If you have some money saved up and are looking for an investment opportunity to build wealth, then real estate may be the solution you are looking for. Investing in rental properties to generate income from tenants can be incredibly lucrative when everything works out.
In most cases, rental payments can more than cover all the expenses associated with owning a property, resulting in money in your pocket each month.Choosing the right property in the right location is a big part of finding success as a rental investor.
Two states that you might be considering for a real estate investment are Michigan and Minnesota. Though close enough to have plenty of similarities, they are also very distinctive. Each has its advantages for rental property investors to leverage.
To make your decision easier, here are a few things to know about buying rental properties as an investment strategy in these two states.
Housing Prices
Many new rental investors start by purchasing something simple like a single-family home or a small multi-family home. These properties are not nearly as expensive as something like an apartment complex, so the upfront cost and ongoing expenses are much lower.
The prices of housing in these two states are comparable, though Michigan has the advantage in terms of affordability. The median price of a home in 2023 is about $255,600 there, whereas in Minnesota the median price is $339,000.
Obviously, the actual price of the property will depend on the location and the local market, but this can give you a general sense of the overall markets in these states.
Financing
Unless you have a ton of money saved up, which is unlikely, you will not be able to afford the full price of a rental property upfront. You will need to research the financing options in each state to evaluate which can provide you with the loan product and terms that will work best for your goals.
For example, the right lender could provide a debt-service coverage ratio (DSCR) loan Michigan investors need to afford a rental property at a better rate than one in Minnesota.
A DSCR loan is given based on the rental income projection of a property compared to its expenses, so even if your personal income could not cover a home loan of the same value, it would be irrelevant for a DSCR loan.
Type of Property
The type of property should also factor into your decision. Do you want to build a brand new apartment complex in a growing community in Minnesota to house many tenants? Even if you cannot afford the full price of the construction with a loan, you may be able to access state grants to help fund the apartment construction.
If you already own a large home in Michigan, you could get a cash-out refinance to upgrade a portion of the home and rent it out to a tenant while still occupying the rest of the house.
Buying a single-family house to serve as a vacation rental outside Grand Rapids or Minneapolis is another option where you could take advantage of popular travel services like Airbnb to market the location.
Tax Rates
Taxes are certainly something you need to consider when evaluating the profitability of rental properties. Higher taxes will cut into your profits. Michigan has some of the highest property tax rates in the country, while Minnesota’s rates are just above the national average.
Income taxes are another factor to be aware of since they will affect your rental income stream. In Minnesota, the income tax range is between 5.4% and 9.9%, so it fluctuates a bit. Michigan, on the other hand, has a flat rate of 4.25%, but some localities also charge an income tax. Taxes are going to hit you a bit harder in Minnesota if you invest in rental property there.
Making the Decision: Michigan or Minnesota
If you came here for an obvious answer to your question, then you are unfortunately going to be disappointed. The reason, however, is because every real estate investor is different.
Your financial goals and how you want to manage a property may be the perfect fit for an investment in Minnesota, even if there are higher taxes on income and more expensive houses.
Or, you could swing the other way, looking for the cheapest possible property and a lower income tax in Michigan. The type of property also impacts your decision, since apartments, condos, duplexes, single-family homes, and vacation rentals all behave differently and come with unique challenges.
Making the right decision depends on increasing your knowledge with research. Understand the taxes associated with each state. Learn about the local markets to find communities that are brimming with potential tenants.
Figure out the type of property you want and the best method for financing it so you can research various lenders and loan products. Investing in rental property could be a huge win for your financial goals, whether you find a good investment in Michigan or Minnesota.