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Learning the Hard Way: Why You Should Invest In Landlord Friendly States

by Lisa Phillips on December 29, 2013 · 49 comments

  
Landlord Friendly State

As a newer investor, there is advice given by more experienced investors that we have to learn the hard way.

One of those truisms is to “invest in landlord friendly states.” However, what can be missing for a new investor are the bruises earned for not listening? This is my own personal view of the lessons learned regarding that truism, and I hope it can shed some clear and specific details on what I encountered, and how this now determines my entire real estate investment strategy.

I’m a newer investor who has invested in Virginia, Maryland, and Ohio, and it’s been and extreme learning experience! However, now that I know the difference between that truism regarding friendly states, I now know that Maryland can be extremely tenant friendly, with Virginia being more land lord friendly. Let me relay to you how figuring this out has specifically changed my entire real estate strategy going forward.

Entitled To Your Earnings

It’s amazing how open tenant friendly city and state governments feel to dipping into your accounts. And, no so subtly enforced through strong arm tactics that can involve code enforcement, the justice system, and legislation to ensure you can not do your business unless everyone gets their share. For tenant friendly Baltimore, MD, this includes paying a $30 rental registration Fee, $30 lead registration fee, and this is in addition to a very active code enforcement agent who’s sole task seems to be to find ways to generate revenue for the city (to be fair, most municipalities are using this to generate money for bare city coffers, not just tenant friendly ones). This is in addition to a $300 yearly LLC filing fee (pretty steep, isn’t it). It all adds up to one hurdle after another to keep track of in order to collect rents.

And in more landlord friendly Virginia, guess what fees I have to pay? None. Guess what rental registrations I have to pay? None. How about that filing fee? $100 a year to start an LLC, and $50 a year to keep it going. Same thing in landlord leaning Ohio, I really don’t have to work as hard to keep my buy and hold real estate strategy, nor pay anyone any fees to conduct my real estate investing business. So, since Virginia and Ohio can obviously run their state without these extra fees, why does Maryland need so many? I’ll never the know the real answer to that, but it’s clear after going through this process that tenant friendly places can offer a larger amount of day to day headaches, that you won’t see in other places.

Now, I and other investors pay these fees and registrations every year and month successfully, but it’s amazing how much pressure this adds to your operations when you’re a buy and hold investor. When people tell you about tenant friendly states or cities, It was hard to get the full details on exactly what they were referring to. After going through this in different states, it’s as obvious as night and day that this should be taken into account when deciding on your real estate investing strategy.

Lead Paint Rules

This honestly can be a show stopper, and it’s amazing how much pressure is applied to landlords in tenant friendly cities/states than in others. For the state of Maryland, for houses that were built before 1950 (the time frame varies in different states, some are as late as 1978). So first new investor: Pay your fee for signing up for lead registration. Next, decide if you’re going for the lead contaminated dust safety test, or the completely lead free certification. Now the fun starts. For the first, the lead dust test, you are required to not only pay an annual fee to register, but also pay a fee to have another lead dust inspection every time a tenant moves out. This cost can be $165-$200. It’s a constant and the only way to get around this is to do a lead free certification. This one is a test that you can apply for, but if there is any lead to be shown in any of the layers of paint in the house, you need to apply for a “compliance plan” where you are going to prove that you will be using certified lead abatement specialists, which comes at a very high cost. It’s a specter hanging over your head, and both can be painful to deal with in different ways.

In Virginia – I just had to give them a disclosure that the property was built prior to them banning lead paint, and a little pamphlet that told them to be mindful of the dangers of lead poisoning and how to avoid it. The last time I heard, we don’t have a large outbreak of lead poisoning in Virginia, so I guess their strategy works without all the fees. The property I have in Ohio was built more recently, and not subject to lead disclosure laws, but I have the feeling it’s just as easy as doing business in Virginia. Those two properties give me very few headaches from the city and state in my real estate investing strategy.

Eviction Process

Nuff said about this right? Turnover is the worse, and the only thing that can make this work is a judicial system that assumes you’re the bad guy as soon as you take someone to court for not paying the rent. What makes it even worse than that, is when deciding on whether a Maryland local court will evict your tenant, they actually have a checklist on their eviction form that they go through to make sure your fees are paid, lead registration is current, and your LLC is in good standing and fully paid for. In my mind, none of those have anything to do with whether your tenants are paying or not paying the rent, but those are the tactics used to make sure everyone else gets paid before you can get justice. Its an interesting difference. Needless to say, the process in Virginia is probably a lot more smoother since those fees don’t exist down here (I haven’t had to evict anyone yet). Amazing the differences in your buy and hold strategy depending on where you invest in real estate. If I knew then, what I know now…

Conclusion

All in all, noticing the absolute difference in how easy it is to invest in a landlord friendly versus a tenant friendly municipality, I can not logically choose to keep investing my money there if I have a choice. And, keep in mind, you can have a landlord friendly city in an tenant friendly state, and vice versa: A landlord friendly state with a tenant friendly city. Real estate is always local.

And, although many investors successfully go through all the hoops, paying all the fees, ensuring they have their lead registration up to date, and collecting rent every month, it’s a hard sell to keep investing there when I have the same profit margins investing in a landlord friendly area that doesn’t require 1/3 or the rules, regulations, and upkeep. At the end of the day, we are all investors that save, scrimp, hustle, and constantly improve ourselves to try to find financial freedom, and if one city has less hassles than others, then it’s a no-brainer on which will be the city of choice to invest in for the future, and how it’s shaping my strategy now.

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{ 49 comments… read them below or add one }

Julie Oldham December 29, 2013 at 2:19 pm

Just wow. I had no idea there were states out there like Maryland making it so difficult to be a landlord! I’m in Colorado, as are all of my rental properties. I’m not sure I would have chosen to do this if I had those kinds of regulations to deal with! As you’ve noted, it seems to indicate a very hostile environment for landlords. I hope you never have to evict someone in Maryland, their rules for that are probably very onerous and slanted toward the tenant as well. Good article, Lisa, I’ve definitely learned something new here. And will definitely keep my buy and hold investments right here at home!

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Lisa Phillips December 29, 2013 at 3:08 pm

You know, if I had not invested in other states, I would not have known that this wasn’t normal. I am keeping my property there, but Its something you just don’t know until after you invested in another area, especially if you’re new like me (Each property was a completely different experience). I’m glad I DO know now, and I understand what more experienced investors are referring to now. And, people successfully invests in these tenant friendly areas, but if you know the difference and can choose…Now, if you can’t choose, you will have all the help you need here on biggerpockets to help you through the process. Im not giving my property up, I am just choosing to invest a little further south for my next properties.

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Gerald Harris December 29, 2013 at 3:08 pm

Having grown up in the Southern California area there was an absolute difference in Living in Los Angeles County vs Living in the high desert when it comes to being a Land Lord. If you are not careful some of these areas are rent controlled. Some areas definately had stricter rules than others. I didn’t realize this until i read this article. Good Deal!

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Lisa Phillips January 19, 2014 at 3:58 pm

Thank you! If expressing these experiences helps other investors on crafting their strategy, I think we will all be better off for it.

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laurice December 29, 2013 at 7:23 pm

Amen! One must find out the rules and regs before buying with intent to rent. Georgia is a landlord friendly state. Depending on the size of the municipality, the eviction process can less than 30 days!

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Lisa Phillips December 29, 2013 at 10:10 pm

Lol! For real estate investing, God Bless Georgia!

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Tim December 29, 2013 at 7:30 pm

Good article for new and old investors alike to consider. As a general rule, Illinois is a landlord leaning State once you are outside the City of Chicago and Cook and all the collar counties. Our LLC annual fee is $250 and outside of the Chicago area, a lead disclosure and pamphlet are all that is required on pre-1978 units. You need to check county by county on annual fees, inspections and evictions but as I said, It is landlord leaning currently but the direction is moving toward the tenants. Not at light speed but in that direction. In Winnebago County where I do business, an eviction is 4-6 weeks start to finish, unless there are issues in serving paperwork or the tenant asks for a trial.

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Lisa Phillips December 29, 2013 at 10:12 pm

Great info!! Im sure a lot of Illinoise investors can appreciate that info.

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Patrick Mike December 29, 2013 at 8:36 pm

Great article Lisa, I’ll be sure to look into how things are ran here in Florida

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Lisa Phillips December 29, 2013 at 10:11 pm

Thank you Mike! For sure, its not something thats easy to pinpoint unless you go through the process, but if you do know and can strategically invest in another nearby jurisdiction, its good to have that foresight. Boy, I wish I had it……..

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Vick December 29, 2013 at 10:08 pm

Amazing! Your article opened my eyes that there are difference in every state in terms of rental regulations. Thanks for sharing! I’ll keep this in mind.

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Lisa Phillips December 30, 2013 at 8:29 am

Thank you Vick. Keeping this in mind is helpful. Some people have a large choice on where to invest, and other’s don’t. If you have a choice this can be applicable, but if you’re stuck in your city thats tenant friendly, you can still be successful though.

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Jason December 30, 2013 at 7:18 am

Until landlords come together to fight those rules, they will only get worse. Join or start a landlord association. There are a few groups in Baltimore working to do just that. I know landlord associations who have fought rent caps in a few cities and won.

Good article.

Jason

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Lisa Phillips December 30, 2013 at 8:26 am

That is excellent advice we all can keep in mind: working to change this norm, not just move away from it. Thank you for the input!

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Julie December 30, 2013 at 12:21 pm

Good article! How do you know which states are tenant-friendly vs. landlord-friendly? I live in Colorado and that is where I invest. I know I don’t have those fees you mentioned, so I assume I am in a landlord-friendly state. I also have a property in Wyoming and the only fees I pay there is for my property manager.

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lisa phillips January 1, 2014 at 8:31 pm

Hi! That’s the million dollar question! I have searched BP and have seen posts that go into this, but until this last house I never strategically searched for that specifically. Now that i know better, I will be giving my property managers a call in each potential city and get their views on it – They know it best! I really respect PMs for their hands on local knowledge, and they are also realtors.

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Dave Newman January 3, 2014 at 1:46 pm

Julie
I am also an investor in Colorado and Wyoming. They both are very favorable to the landlord. The downside to Wyoming is that I own them in a LLC and when I do evictions I must use an attorney which cost more than doing yourself. Other than that, I have had a good experience owning there.

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Julie January 3, 2014 at 9:31 pm

My Wyoming property is completely run by property managers. The only issue I have had is a prior tenant owed a few hundred dollars and after he moved out, they never found him. Other than that, the home has only been vacant for 3 weeks total since 2007. So, hopefully, I will not have to evict!!

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Ricardo Henriquez January 1, 2014 at 1:37 pm

Thanks for the great article and insight Lisa, this was very timely as I am still doing research on areas before investing.

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lisa phillips January 1, 2014 at 8:32 pm

Thanks Ricardo. I and biggerpockets will definitely be here every step of the way!

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Erika January 2, 2014 at 9:49 am

This is such an interesting post. I am also a novice buy-and-hold investor with property in VA and MD. The cost associated with seasonal renting in Ocean City, MD were so high, we stopped renting the house in 2012. I concluded (perhaps erroneously?) vacation properties were just not good investments. Maybe they aren’t, but not I am wondering if this is just part of being a landlord in the state of MD? I haven’t experienced anything like it in VA.

In MD in 2012, we paid about $100 for a rental registration, $200 for noise abatement certification (??)) and a 10% rental tax on all rental income the City of OC. On top of that, our property management company took an 18% cut off the top (standard for weekly rentals in that area), charged customers an additional 5% “processing fee,” and charged us $80 weekly cleaning fee and a yearly maintenance fee of $200 (which only included limited service visits). In addition, all the damage caused by the tenants (mostly broken furniture…lights, bed frames, chairs, etc.) was automatically considered “normal wear and tear”. The burden was on us to prove negligence, and since we couldn’t do that from 150 miles away, we had to pay to fix/replace everything. We ended up with about 50% of the gross revenue for the summer (before income taxes) – much less than the 80% I budgeted for!

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Lisa Phillips January 2, 2014 at 11:22 pm

Wow Erica! If I thought it was just me, now I know it isn’t. All those mouths to feed just make things run so much less smoothly than in other places.

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Hunter Letchman January 2, 2014 at 11:49 am

I have properties in both Georgia and Texas and they’re both landlord-friendly states. They are both also pro-business and the economies are improving, which is very important to keeping tenants in rentals as well. Lots of good input here, and I thank you for the article.

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Lisa Phillips January 2, 2014 at 11:18 pm

Thank you for commenting! You know, now that I am firmly in the real estate investor category, I am so happy to hear about states like Texas and Georgia. It let me know that If I exercise my options and do business there, as well as there are large swaths of this country that let businesses and people handle relationships themselves without thinking they need to be involved in every transaction.

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Dave January 2, 2014 at 12:18 pm

Great article Lisa. I practice in Real Estate in Florida and Massachusetts. In Florida the laws are landlord friendly. In Mass it’s tenant friendly. To evict in Florida is much quicker than in Mass. Good luck evicting someone in the winter. You’re article is very relevant to investors who want to invest out of state. Every state is different.

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Lisa Phillips January 2, 2014 at 11:23 pm

Exactly! Its amazing how much easier one is than the other for your real estate business. Thank you for posting

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Pete January 2, 2014 at 2:34 pm

Lisa another thing ( i am assuming you own in the DC area of northern VA and MD) is the difference in taxes. Taxes are crippling in MD compared to OH or VA. Also, I am sure you are getting more bang for your buck in Ohio than VA or MD (cost cs rents).

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Lisa Phillips January 2, 2014 at 11:26 pm

You know, interestingly enough Virginia gives me more bang for my buck, because rents are $200+ higher on avg. Oh in general, seems to have lower rents in most cities than cities of comparable sizes here in Virginia. I study google maps and craigslist obsessively and noticed this difference. So, VA is my favorite state, and this is in many areas. However, I will say OH and VA seem to have older homes that are well maintained (maybe because of their agrarian roots).

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Mike M. January 2, 2014 at 3:03 pm

Excellent points in an excellent article!

Not only do certain states, but several cities also qualify as “landlord unfriendly.” Though the rules and fees start out with good intentions, over time they often change for the worse.

Landlord fees become more important than tenant- and neighborhood-protection rules to the various regulatory bureaucracies; and as the system gets more and more onerous, it encourages cheating and rewards cheaters.

Good property managers may check out (or are so turned off, they never check in), leaving slumlords and large, out-of-area firms with deep pockets (but little local commitment) behind.

Good landlords need to band together, especially in this age of special interests group that dominate policy making. Anymore, if you don’t have a special interest group, you don’t get heard.

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Lisa Phillips January 2, 2014 at 11:28 pm

SO true in so many ways. In Baltimore, MD, I have met many property managers that are moving their own investments to Baltimore county, right outside of the city limits, because you can still get a decent return without dealing with the local govt rules and regulations.

However, I will take your words of banding together seriously- Its only when we get off our duffs and do something, that anything ever happens!

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RC January 2, 2014 at 4:47 pm

You will usually find that the more blue the state/area, the less landlord friendly it is

Look at the examples here – Chicago, Massachussetts, etcl

Generally, bigger cities are more problematic.

FWIW, Tennessee is landlord friendly, so is VA

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Lisa Phillips January 2, 2014 at 11:30 pm

Good Info, and sometimes it comes down to blue versus red (although there are, of course, exceptions). And even then, its city by city has been my experience. I.E. Baltimore county versus Baltimore city.

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Joan January 2, 2014 at 11:02 pm

California is a tenant friendly state, but no landlord fee, lead disclosure brochure is enough, some cities have rent controls, San Francisco is worse place to own a rental.

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Lisa Phillips January 2, 2014 at 11:30 pm

Lol, I love to visit San Francisco, but I guess I shouldn’t invest there? I can’t even imagine…

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Charles January 3, 2014 at 7:29 am

Lisa,
You are definitely right on point! I have rentals in Tx, Fl & Md (Baltimore), and Md is BY FAR the most ornerous with their regs, burdens, code enforcement and HUGE taxes. I’ve been very fortunate to have a solid cushion, but a newbie could get a rude awakening if they weren’t prepared for the expenses other than typical PITI. I will say that the high rent levels, especially section 8, help offset some of that as long as you have solid tenants, but one vacant month can wipe it all away. Solid property management team and tracking of registration requirements are essential to be successful there. I haven’t even touched on the tenant/landlord legal issues…

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Lisa Phillips January 3, 2014 at 9:14 am

I have to agree! My MD property IS my biggest cash flowing queen, so Im not going to leave it off the table. However, investing MORE money there knowing how much onerous it is? I can’t do that…

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Geoff January 4, 2014 at 5:12 pm

Lisa, I always look forward to your broadcast, very informative, and well put together, thanks for your input.

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Lisa Phillips January 4, 2014 at 6:09 pm

Thank you very much Geoff. I REALLY appreciate that comment!

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Jeff Hobart January 5, 2014 at 12:50 am

Thank you Lisa – nice video blog. We are in Australia and have invested in Atlanta GA for some of the reasons you have highlighted.
Being from Australia, with no ties to any one state, we were influenced by climate, employment opportunities for tenants and of course as per your article – Tenant Friendly Vs Landlord Friendly.
We were warned about high taxation states and other challenges as you have mentioned.

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Lisa Phillips January 5, 2014 at 8:16 pm

Forward thinking is probably making the process as smooth as possible, especially investing so far away. Congrats on being able to do this from Australia! That’s amazing, actually. And good choice about Georgia, apparently :-)

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Ali Boone January 9, 2014 at 12:23 am

One good thing that is offered now is Rent Protection insurance policies. Very helpful for tenant-friendly states if you are a landlord. It is actually offered now even in landlord-friendly states, but it originated because of tenant-friendly issues. It doesn’t solve all the problems, but it certainly covers a lot of the costs and makes it easier now to invest in those states. I even have it on my landlord-friendly state properties.

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Lisa Phillips January 19, 2014 at 3:59 pm

Thanks Ali! Excellent advice, as usual!

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Lisa Phillips January 11, 2014 at 6:06 pm

Thanks Ali! Do you know any national chains that you can suggest?

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Steve Burgess January 18, 2014 at 11:02 pm

Wonderful article enlightening why it is important to invest in landlord friendly States.Though every state has got its rules & policy, which needs to adhered too.

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Lisa Phillips January 19, 2014 at 4:00 pm

Yes! It really is very local. We say it all the time, but the significance is outstanding when it comes to pricing and regulations.

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Daniel Brueske January 28, 2014 at 10:06 am

Thanks for the article, Lisa — a very helpful “heads-up” to new investors!

Does anyone have any suggestions for someone who does not yet own any rentals for how to determine which states are more/less landlord friendly?

For example, I live in Kansas City. I could easily start investing in either Kansas or Missouri. Is there a method you would recommend for evaluating the “friendliness” of each of these states?

Or, if neither state happens to be very friendly, how would someone go about finding a “friendly” state?

Thanks

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Lisa Phillips January 28, 2014 at 7:41 pm

Once I decided on an area (city specifically), I will send an email to the 1) the head of the local REIA and 2) A local property manager and ask them this: Is it hard to evict a non-paying tenant and the turn around time, and Are there a lot of regulations and registrations to get the house rented. For my experience, those are my biggest red flags. This should only take 10 minutes at the most. Good thing you can find both of these entities online now without doing too extensive a search.

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Mehran Kamari March 26, 2014 at 10:19 am

This is one of the many reasons why I don’t invest in California for buy & hold!

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Lisa Phillips March 27, 2014 at 3:28 pm

Mehran, I understand NOW why that is a choice everyone has to make for their own real estate investing “peace of mind.”

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