With so many investment markets to choose from, figuring where to buy rental properties can be a daunting prospect. While investors can find opportunities just about anywhere, your choice of market can make or break your wealth-building efforts.
Most lists you find will focus on specific cities best suited for investment. We’re zooming out a little to help you narrow down your options without boxing you in to specific cities. Within these states, you’ll find some of the best markets around for passive buy-and-hold real estate investment.
Our Criteria:
- State Tax Laws – Because states have their own rates for income (because yes, rental income is taxed as regular income on both the state and federal levels) as well as property taxes, targeting states with favorable tax rates is just one way to decrease your tax burden and boost your bottom line.
- Overall Affordability – While affordability will vary from individual market to market, certain regions of the U.S. are more affordable than others. This is based on a myriad of factors, but mainly concerns the cost of living for residents, median income/income growth, and the cost of real estate.
- Migration Patterns/Population Growth – It isn’t enough to be affordable. The market must be desirable, too. Patterns of steady population growth, particularly in-migration, are key.
- Economic Hubs – States are each unique, but the best places for investment are those with multiple cities we could call “economic hubs.” That is, areas experiencing economic growth and increasing new construction. These don’t have to be primary markets – just stable, growing markets of any size.
You’ll notice that all our picks are in the South or Midwest. This isn’t personal bias, but rather a reflection of pandemic-era migration patterns. The warmer, sunnier climates, greater land availability, generally low cost of living, and less dense population have made the region highly attractive over the past few years.
The Top 5 States for Purchasing Rental Properties
#1 – Texas
- Effective Real Estate Tax Rate: 1.80%
- State Income Tax: 0%
- Median Household Income: $68,093
- Median Home Value: $172,500
- 2020-2021 Estimated State Population Growth: 1.01%+
Texas has been the star of the real estate show since the United States began its recovery from the Great Recession. Home to world-class markets like Dallas, Austin, and Houston (along with smaller flourishing metro areas across the state), Texas has made its mark as a business-friendly state. While the effective real estate tax rate here is a bit higher, the lack of income tax softens the blow. Over the past few years, the major markets have seen increasing real estate demand, appreciation, and population growth.
#2 – Tennessee
- Effective Real Estate Tax Rate: 0.71%
- State Income Tax: 0%
- Median Household Income: $54,665
- Median Home Value: $167,200
- 2020-2021 Estimated State Population Growth: 0.51-1.0%
Our home state is one of the best you’ll find for investing. Tennessee, like Texas, has no state income tax. Here you’ll find economic hubs like Memphis, Nashville, and Knoxville, along with smaller, bustling cities like Jackson, Chattanooga, Gatlinburg/Pigeon Forge, and popular Nashville suburbs like Franklin, Smyrna, and Murfreesboro. Although Nashville real estate can run high, most opportunities are highly affordable for investors.
#3 – Alabama
- Effective Real Estate Tax Rate: 0.41%
- State Income Tax: 2%-5% (Progressive Rate)
- Median Household Income: $54,393 (2020)
- Median Home Value: $142,700
- 2020-2021 Estimated State Population Growth: 0.01-0.5%
The common theme you’re seeing? Affordability. These southern states are top dog when it comes to a low cost of living. As we guard our finances in the wake of inflation, you’ll find that these states appreciate at a slow-and-steady pace that rarely results in overinflated values. There’s plenty of demand – it just tends to be more reasonable than in other regions of the U.S.
Alabama has one of the lowest effective real estate tax rates on record. Cities like Birmingham, Mobile, Huntsville, and Tuscaloosa (home to the University of Alabama) attract young professionals. In fact, Huntsville is one of the most rapidly growing markets in the country.
#4 – Mississippi
- Effective Real Estate Tax Rate: 0.81%
- State Income Tax: 3%-5% (Progressive Rate)
- Median Household Income: $44,966 (2020)
- Median Home Value: $119,000
- 2020-2021 Estimated State Population Growth: -0.59-0.00%
Based on median home values alone, Mississippi is the most affordable market on our list. The capital city, Jackson, is experiencing renewal at the hands of young professionals and entrepreneurs while college towns like Oxford (the University of Mississippi), Starkville (Mississippi State University), and Hattiesburg (The University of Southern Mississippi) bustle with amenities for students, vibrant suburbs, and business growth. Then there are Mississippi’s popular Gulf Coast markets: Gulfport, Biloxi, Ocean Springs, and Pass Christian. No matter what, investors will get more bang for their buck in Mississippi markets.
#5 – Oklahoma
- Effective Real Estate Tax Rate: 0.90%
- State Income Tax: 0.5%-5% (Progressive Rate)
- Median Household Income: $52,341
- Median Home Value: $136,800
- 2020-2021 Estimated State Population Growth: 0.51-1.00%
Oklahoma is the most midwestern state on our list. The largest markets here are Oklahoma City, Tulsa, and Norman. As a whole, the state excels in oil and gas production (like Texas, they help decrease U.S. dependence on foreign oil), agriculture, and aviation/aerospace. Another affordable market with modest growth, investors can expect stable, reliable investments here.
( Statistics courtesy of NerdWallet, WalletHub, Census.gov and FRED. )
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