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Should Real Estate Investors Avoid “Death Spiral” States?

by Editor | ezLandlordForms

Real Estate Investing in Death Spiral StatesThe financial fall of Greece and closer-to-home Detroit have raised some unpleasant questions for Americans in many states, largely around the theme of “Is my state/city next?” (or an even more chilling “Is the U.S. next?”). While it’s easy to spot booming cities like Austin versus troubled cities such as Detroit, states are not quite as easy to evaluate at a glance.

At the end of last year, Forbes ran a disturbing report on what they called “death spiral” states, which they identified based on two measures: the “taker-to-maker” ratio, and an audit of each state’s credit-worthiness done by Conning & Co. The “taker-to-maker” ratio compares the number of private-sector earners who net money into the state treasury’s coffers (makers), to the number of people who pull money out of the state budget – public employees and recipients of social welfare payments and pensions (takers). Federal employees were not counted as takers, since they do not drain funds from state coffers.

The purpose is not to make a value judgment (society obviously needs public employees, such as judges, bridge-builders, etc), nor is the list political, as it contains its fair share of both red and blue states. But the ratio does help measure the economic health of a state; just imagine how quickly a state would lose money if for every private worker paying money into the treasury, there were three people expecting to take money out of it each month. What would this state do? They would probably raise taxes, leading employers and more successful citizens to move away, and then there would be even fewer jobs and private employees paying into the state’s coffers, creating a downward “death” spiral.

Currently the worst taker-to-maker ratio in the nation is New Mexico’s 1.53, meaning that for every 100 private-sector employees, there are 153 people dependent on state revenue. There are eleven death spiral states, with a ratio of 1.0 or higher; see Forbes’ full list here.

For Conning & Company’s annual State of the States audit, they take a wide range of factors into consideration, ranging from lofty state debt to weak housing numbers to high unemployment to unfriendly business climates. Conning & Co. are known for their risk analysis of insurance companies’ portfolios, and their audit is made to determine how credit-worthy each state is as a borrower, if you were to lend them money in the form of a bond.

Which returns us to Square One: should you invest in these states? Whether buying state bonds or buying real estate in these states, the effect is the same: you are investing in the state itself, and will either lose or make money alongside that state. This begs the question: “Why should I invest money in a poorly-managed state when there are well-managed, more successful states I could be investing in?”

If you live in a death spiral state, consider looking elsewhere to invest, or perhaps even moving. As states grow hungrier for revenue, they may increasingly resort to exit taxes and audits of those who try to change their residence elsewhere. Many higher-tax states (such as Massachusetts) have already begun implementing unofficial exit taxes, in the form of audits and reduced periods of time spent in-state allowed without filing a return there (for example Minnesota’s “snowbird tax”).

It’s hard to get excited about investing in a state that won’t let you leave without an audit.

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