Landlord Friendly States for NY Investors

Hey Chat GPT, how can NY solve its housing crisis and enact policies to redistribute some property to landlords so they can profit more from their investments?

Investors and their service providers are desperate to find solutions to unlock rent growth and slow property tax growth. This year, the Department of Finance valued an office tower at 135 West 50th Street at $295 million (and taxed it based on that value), and last week, the property sold for $8.5 million. This disconnect between state and city agencies' perceptions, policies, and actions from market activity is glaring – and industry experts have confronted this reality for years. Asking how state leaders can provide investors relief from the encroachments on their property rights isn't the question to ask.

A better question is: Where in the country can investors find environments more hospitable to multifamily investment?

Deciding where to invest capital in real estate needs proper consideration, and in this short write-up, I'll present two ways of looking at the problem. This piece is for:

• Family offices looking to deploy capital outside of NYC

• Private investors who are thinking of selling in NYC once rates come down

• Investors currently in 1031 exchanges who want to reinvest outside of NYC

• Your uncle who won't stop interrupting you at holiday events???

Landlord-State Approach

Consider landlord-friendly jurisdiction orients landlords towards red states, which typically have policies in place to court investment and businesses from other municipalities. Instead of erecting protections and regulating, these states favor building and growing – businesses, real estate, and populations. However, that's too broad a perspective on which to base investment decisions. Instead, it's essential to identify specific policies that translate to continued rent collection and rent growth. In New York, rent control is a policy that directly limits rent growth, and elongated eviction procedures can dent cash flows. Below, I look at a few policies that make a landlord state landlord friendly.

Ease of Eviction

Sometimes landlords end up with difficult tenants that don't pay rent, damage property, or ignore tenant lease responsibilities. Landlords can de-risk bad tenants before they move into apartments by ensuring they screen tenants appropriately for their ability to pay rent. But, if tenants are already in place, sometimes the only option is to remove them via evictions. Landlord-friendly states make this re-dress easy and painless. In Alabama, for example, landlords can evict tenants for not paying rent with just seven days' notice, and in Florida, it can be as quick as three days in some cases. Landlord-friendly states embrace the view that landlords are investors and tenant non-payment or illegal activities or disruption means a breach of contract, wherein investors must be redressed and allowed to be made whole.

Rent Control

Rent control is self-explanatory. Holding all other things equal (like rent growth, demand for housing, vibes), which is hard to do in real life, rent regulations reduce profits and upside. Landlord-friendly states do not have rent controls. In some cases, these states will have explicit, written bans on rent controls, like Texas and Arizona, which prohibited the use of rent controls in 1993 and 1981, respectively. New York investors might have difficulty imagining this, but it does exist.

Building Code Compliance

New York investors will face a flurry of building inspection requirements in 2025, including the following:

• Local Law 111 to conduct XRF lead testing

• Local Law 153 – Gas Piping Inspections (Community Board 1,2,3,5,7,10, 13, 18)

• Local Law 11 – Façade Inspection Safety Programs

Some owners have spent $000,000s to repoint facades, especially in landmarked districts. A similar story can be said of lead paint inspections and remediation. On the other end of the spectrum, there are places that have much less regulatory oversight, like Houston, TX, which has no zoning-use laws restricting specific uses. Reduced building code compliance makes things easier for property owners because it frees up time and resources to be used on real future or existing real estate projects.

Notice of Entry Rules

States that require advance notice of entry can sometimes worsen problems that need attention. For instance, in South Carolina, landlords can enter properties without notice to make repairs tenants requested or to provide regularly scheduled services, per lease agreements. In Washington, DC, on the other hand, a routine visit requires 48 hours' notice. Repairing or fixing issues on the property without having to manage another layer of coordination (beyond the repair team that's going to solve the issue) makes life easier and makes problems go away earlier.

Bill and Repair Laws

Bill and Repair Laws allow tenants to manage and repair issues themselves and bill back those repairs to landlords. This can lead to inflated expense budgets and is bad for business overall, especially at scale.

Security Deposit Rules

When work hires don't work out, sometimes they must be let go for the organization to put itself back on track to whatever it's hoping to achieve. Sometimes, it's unavoidable to fire an employee. In some cases, a more structured interview process could have led to a better understanding of a candidate and her strengths and weaknesses. Picking tenants is parallel in some respects to selecting job candidates. The less diligence is done upfront on a prospect; the more negative surprises could be revealed down the road that require tenant removal. But sometimes, it's difficult to understand tenants, and the same questions asked in job interviews are inappropriate for landlords to ask prospective tenants. Avis rental managers do not ask about the driver’s strengths and weaknesses during car rentals. Instead, they ask for a deposit on the car. The security deposit in a rental contract acts as a catch-all and makes it clear to the landlord that the tenant has "skin-in the game" and won't create unnecessary property damages. The smaller the security deposit is, the more the landlord needs to diligence the tenant to understand the risk of not getting paid rent. With big deposits, that assurance is gifted up front. Consequently, states that are landlord-friendly allow landlords to decide how they want to manage this process: whether they ask for higher deposits and rent to anyone or ask for lower deposits and really get to know tenants is up to them.

Below is a break-down of some of the key policies of the landlord friendly states, offering a good snapshot of how differently multifamily properties could be operated under these jurisdictions.

Tax-Efficient Approach

Another popular approach to deciding where to invest dollars is to look at tax rates because taxes are usually a large portion of property expenses. Knowing effective tax rates can help guide decisions about where the best tax-adjusted returns exist.

Using this approach will reveal many states with no state income tax, such as Alaska, Wyoming, and New Hampshire. The problem with leveraging this framework alone is that it doesn't account for areas that are "anti-landlord." For instance, Alaska has a very difficult process for removing tenants. Further, looking only at optimal tax structures might divert attention from more critical fundamentals like multifamily supply and demand and future market growth drivers.

A better approach is to find markets with strong fundamentals, that offer preferential tax treatments, and treat landlords as investors with a suite of rights to effectively manage their investments and redress issues – in the broadest scope possible. Florida, Texas, Indiana, Arizona, and Colorado, all score highly on low effective tax rates, market fundamentals, and landlord friendliness. It's important to caveat that insurance costs have risen dramatically in many of these areas that are prone to extreme weather conditions and that this may have material effects on business plans (my write-up here covers some of the severe insurance issues that the US will need to contend with soon).

New York's Total Tax Burden is close to 3x that of Florida's, which tells us that something is wrong with the taxation in NY– and that there may be more tax-efficient areas to invest in. It is essential to highlight that states without income tax do not always have higher property taxes than states with income taxes. Homeowners in New York State, which levies state income taxes of 10.9% to those in the highest income bracket, pay more in property taxes per dollar of property values than homeowners in Florida. Developing state property tax averages isn't 100% accurate since these taxes get decided at the county level. Further, taking tax data from owner-occupied homes and applying these percentages to multifamily is imperfect. But, given how stark the differences are, it's very likely that New York multifamily owners are contributing significantly more of their overall incomes to taxes– perhaps 2x-3x more- than owners in Texas of similar income levels.

For those tired of the New York market, there are many more areas than only New York to invest capital into. For those who don't believe the above: I will explain next week how to navigate the unfriendly landlord state that has the best fundamentals in the country.

I am bullish on NYC Multifamily. If you are actively seeking opportunities, please email or call me to discuss.

212 658 1471

-Romain Sinclair

Sources:

• iProperty Management – Landlord Tenant Rights

• New York Times – Tax Revenues From NYC Office Buildings Rise, Despite Vacancies

• Azibo - Top Landlord-Friendly States: Picking the Best for Your Goals

• Bigger Pockets – Top 7 Landlord-Friendly States to Buy Your Next Rental Property In

• Tax Foundation – State and Local Tax Rates, 2024

• PropertyShark – 2024 US Property Taxes by State Report

• Investopedia – Overall Tax Burden by State