Are you unsure of where to invest in a rental property? One way of finding the best places to invest in real estate is by looking at the price to rent ratio by city. The price to rent ratio is a simple real estate metric that measures what is more affordable in a given city: to buy a house or to rent one. Basically, it calculates the ratio between property prices in the real estate market and annual rent. Thus, the formula for calculating the price to rent ratio is:
Price to Rent Ratio = Average Property Price/Average Annual Rent
For example, according to Mashvisor’s data, the property price in the Dallas real estate market is $440,058 and the average monthly rent is $1,829 (annual = $21,948). Following the above formula, the price to rent ratio in Dallas is 20. But what does this number mean exactly? Well, the price to rent ratio by city is classified into three ranges:
- Low (15 and below): It’s better to buy a house than to rent one
- Moderate (16-20): It’s usually better to rent than to buy a house
- High (21 and above): It’s definitely better to rent a house than to buy one
Why Do I Need to Know the Price to Rent Ratio by City?
Knowing the price to rent ratio in your housing market is important whether you’re a renter/homebuyer or a real estate investor. Renters/homebuyers need it to decide whether buying or renting makes more financial sense. As a real estate investor, the price to rent ratio helps you find the best places to buy a rental property for high returns.
Related: 10 Best Places to Invest in Real Estate in 2019
If you’re thinking of investing in real estate, keep reading as we show you the price to rent ratio by city in the US housing market. We also discuss the advantages and disadvantages of investing in markets with a low, moderate, and high price to rent ratio. This will help you further understand why it’s better to buy rental properties in certain markets than in others.
* Note: The following data is provided by Mashvisor’s Investment Property Calculator. Mashvisor makes it easier for real estate investors to find and analyze investment properties in any city or neighborhood in the US housing market. To learn more about our product, click here.
Low Price to Rent Ratio by City
As mentioned, a low price to rent ratio falls below 15. This number indicates that it’s better to buy a home because property prices are cheap relative to rents in that city. For example, the price for houses for sale in Baltimore is $224,970 (lower than the US median price of 275,000 according to Zillow) and the monthly rent is $1,512 (close to the US median rent of $1,625). As a result, rental demand may not be as strong in this city as it is in other real estate markets.
However, there are some advantages to investing in cities with low price to rent ratios. The most obvious one is the lower property prices. These real estate markets are a good place to consider for investors looking to buy investment properties in cash rather than take out a loan for financing. The second benefit is the high rental income. Mashvisor’s data shows that the monthly rental income in these cities is pretty high. So if you find a renter for your investment property here, you’ll enjoy positive cash flow and good cash on cash return.
Here’s our list of the lowest price to rent ratio by city:
City Price to Rent Ratio
San Antonio, TX 15
Detroit, MI 14
Milwaukee, WI 14
Baltimore, MD 12
Moderate Price to Rent Ratio by City
A moderate price to rent ratio falls between 16 and 20. This is basically a neutral zone where it’s probably better to rent a property rather than to buy one because prices are rather high compared to rents. As a real estate investor, this tells you that you can expect decent demand for rental properties, meaning you can find good investment opportunities in these markets.
Let’s take Tampa for an example. Based on Mashvisor’s data and analytics, houses for sale in Tampa have a price of $328,520 and an average rent of $1,511. As you can see, property prices here are higher than the national, while the rental rate is lower. You can expect more people to be looking for houses to rent than to buy. So, you should definitely look into buying an investment property in Tampa!
Related: 2019 Tampa Real Estate Market Forecast
However, property investors need to carefully conduct a neighborhood analysis before investing in such real estate markets. The price to rent ratio by city doesn’t take into account how each neighborhood is performing in the city. While Tampa has a moderate price to rent ratio, does that mean that every neighborhood in the city is good for real estate investing? Of course not. This is why you need to conduct a neighborhood analysis to find a good location before buying an investment property. And after that, a real estate investor also needs to perform an investment property analysis to ensure buying a positive cash flow rental property in that neighborhood.
Here’s our list of price to rent ratio by city with moderate rates:
City Price to Rent Ratio
Dallas, TX 20
Durham, NC 20
Nashville, TN 20
Richmond, VA 20
New Orleans, LA 20
Virginia Beach, VA 20
Pittsburgh, PA 20
Scottsdale, AZ 20
Jacksonville, FL 19
Memphis, TN 19
Atlanta, GA 19
Bakersfield, CA 18
Chicago, IL 18
Tampa, FL 18
Minneapolis, MN 18
Philadelphia, PA 18
Houston, TX 18
Orlando, FL 17
Indianapolis, IN 16
Columbus, OH 16
To start looking for and analyzing investment properties in your city and neighborhood of choice, start out your 14-day free trial with Mashvisor now!
High Price to Rent Ratio by City
A high price to rent ratio is above 21. This number tells renters/homebuyers that you should definitely rent a property and not buy one. Property prices are too expensive compared to rents in these real estate markets. Consequently, property investors are encouraged to invest here due to the strong rental demand. In fact, of the 16 cities on our list, 5 ranked in the top 10 markets to watch and 9 are in the top 20 according to the PwC’s Emerging Trends in Real Estate 2019 Report.
Additionally, many of them made it on lists of cities where it’s more affordable to rent than to buy in the US. In the Austin real estate market, for example, the price for homes for sale is $514,702 (more than double the national!) while the average rent is $1,898. The city’s 2019 population growth is also projected to be 3 times higher than the national average. This new population is looking for places to live and will most likely choose to rent.
Related: Report: It’s More Affordable to Rent than Buy a House in 2019
There are certain disadvantages of investing in real estate where the price to rent ratio by city is high. Of course, there is the expensive property price which not all investors can afford. Second, while the rental demand is high, the rental rate might not be high enough to cover the expenses of owning an investment property. Thus, a rental property may not always be a profitable investment in such competitive markets.
The best thing for a real estate investor to do is to use a Heatmap Tool. With this tool, you can see how different areas in the city are performing based on other real estate metrics like the cap rate, cash on cash return, and rental income. This allows you to find where the best investment properties are in these cities.
Here’s our list of price to rent ratio by city with the highest rates:
City Price to Rent Ratio
New York, NY 30
Seattle, WA 30
San Francisco, CA 28
Boston, MA 28
San Diego, CA 25
Phoenix, AZ 25
Raleigh, NC 25
Los Angeles, CA 24
Denver, CO 23
Las Vegas, NV 23
Austin, TX 23
Charlotte, NC 22
Sacramento, CA 21
Miami, FL 21
Washington, DC 21
Grand Rapids, MI 21
So, What Should Real Estate Investors Expect in 2019?
Taking into consideration that only 5 of the major cities in the US have a low price to rent ratio, it’s safe to say that more people are going to choose to rent rather than buy in 2019. The main reasons for this trend are the increasing property prices and mortgage interest rate. As a result, first-time homebuyers are choosing to keep renting until they can afford to buy and own their homes. For property investors, this should mean that buying rental properties will continue to be a profitable real estate investment!
To start looking for and analyzing the best investment properties in your city of choice, click here.
Is This Enough for Real Estate Investors?
While it’s important to check the price to rent ratio by city, it’s not the only thing to take into account before buying investment properties. First off, this ratio doesn’t say anything about the economic growth, crime rate, whether it’s a seller’s or buyer’s market, and other factors that make for good places to invest in real estate.
Moreover, real estate investors need to calculate the cap rate and cash on cash return as they’ll determine your rate of return on the rental property. You can easily do that with Mashvisor’s Investment Property Calculator! Remember, the better you do your due diligence and take the proper steps of investing in real estate, the higher your chances are to find the best investment opportunities.
