Investor Beware: Politics Render These States and Cities Unviable for Investment

The impact of taxes and regulations on investors' bottom lines isn't always straightforward and can often be obscured by political biases. Research from Yale demonstrates that individuals tend to perform worse on math problems when the correct answers challenge their political beliefs.

Full disclosure: I hold neither major political party in high regard and have cast my vote for each with roughly equal frequency over my lifetime.

Now, let's refocus on real estate investing.

Taxation and Population Dynamics

Population shifts profoundly affect real estate demand, and a declining population presents a significant challenge for investors. Understanding these population dynamics is crucial for real estate investors.

In recent years, there has been a narrative suggesting that more Americans are migrating from high-tax states to low-tax states. Is this narrative accurate?

To investigate, I examined raw data from the Census Bureau and mapped population changes across all 50 states. Notably, investment analyst Ben Reynolds highlighted examples such as Texas and Florida, which have seen rapid population growth coinciding with their favorable tax environments.

This prompts the question: how do these population shifts correlate with state taxes? Fortunately, data on tax burdens is readily accessible.

Tax Burden Analysis

Annually, WalletHub ranks states based on their total tax burden, encompassing state income taxes, property taxes, and sales and excise taxes.

Predictably, New York tops the list with the highest tax burden, coinciding with a significant population exodus of nearly 102,000 residents last year.

Examining states experiencing population loss reveals a consistent trend:

California

Hawaii

Illinois

Louisiana

New York

Oregon

Pennsylvania

West Virginia

Remarkably, the average tax burden ranking for these states is 14, with only one state ranking above the median. This correlation between tax burden and population change is evident, although skeptics may argue against causation.

While taxes may not be the sole determinant of relocation decisions, they undeniably influence migration patterns, particularly among wealthier individuals and corporations relocating headquarters.

Moreover, investors should consider the direct impact of state and local taxes on property investments, which can erode returns.

Regulatory Hurdles for Landlords

Landlords often face criticism, yet they provide essential rental housing. However, in certain jurisdictions, activists have enacted regulations favoring renters over landlords, exacerbating operational challenges.

Regulatory risks, such as lengthy eviction processes, significantly impact investment viability. Consider the pandemic-era eviction moratoriums, which prolonged rental contract enforcement issues in tenant-friendly markets, posing substantial financial burdens for landlords.

As a result, anti-landlord regulations increase investment risk and operational costs, necessitating cautious consideration.

Navigating Investment Risks

While I don't adhere to a political agenda, I exercise caution when investing in high-tax or regulation-heavy jurisdictions due to increased expenses and risks.

For instance, when evaluating multifamily investments in such areas, I expect compensatory advantages elsewhere to mitigate risk. However, I remain open to opportunities in these markets, provided that the investment strategy accounts for regulatory challenges.

Ultimately, investors must evaluate risks comprehensively and recognize the implications of taxation and regulation on investment returns. Ignoring these factors can jeopardize financial outcomes.

In previous post: "Betterment VS Wealthfront: What is the REAL Difference? "