Real estate investing is never about making decisions on a whim and hoping for the best outcome on your real estate property in terms of high ROI and positive cash flow returns. A wise real estate investor takes into account the ever changing economic and market conditions before deciphering the best real estate strategy. There are many key indicators to look for when finding the best real estate investment opportunities, and it is never by chance. Smart investing looks at key economic conditions as a general indicator of whether or not to invest in a specific market, but there are specific indicators that must also be taken into consideration when it comes to deciding which real estate property will yield higher ROI than other real estate opportunities in terms of cap rate, cash-on-cash returns, occupancy rate, rental income, price to rent ratio, etc.
And there is no need for manual work either; Mashvisor readily gives you all these valuation metrics for any property across the US. You will access and compare thousands of properties across the country to make better real estate decisions and reap financial rewards. At the end of the day, your goal as an investor is to get a great return.
Related: 10 Important Real Estate Questions to Think About Before Buying an Investment Property
What is Price to Rent Ratio?
In a nutshell, the price to rent ratio allows you to decide whether to buy or rent a property for better financial rewards. It is calculated as the ratio of home prices to annual rental rates. This metric gives you a clear answer to the question whether or not to invest in a specific real estate market. The goal is to invest and get back high returns on your investment strategy, thus calculating the price to rent ratio is a surefire way to know where you should be investing and what the returns on those investments are, aka the rental income. The price to rent ratio, or the P/R ratio, is inversely proportional to rent, which means the higher the ratio or the price of the home, the lower the income or the accumulated earnings of the investment property.
The price to rent ratio is calculated as follows:
Price to Rent Ratio (P/R) = Average list price / (Average rent * 12)
*Average list price and average rental income can be found on Mashvisor.com
Key Notes on the Price to Rent Ratio:
- Ratio between 1-15 means it is better to buy.
- Ratio between 16-20 means it is better to rent.
- Ratio of 21 or more means it is better to rent.
For Example:
In City X, the average real estate value is around $200,000 with an average rental income of $1,000 per month. What is the price to rent ratio? And what does it mean? Is it better to buy or rent in City X?
P/R = $200,000/ (1000 *12) = 16.67
This means that in City X it makes more sense to rent rather than to buy as the city is expensive for buying real estate. When the list price is high and the rental income per month is relatively low, the P/R is high. A high P/R ratio often indicates that the home is too expensive relative to its rental income and in turn the value on the home will likely drop. In previous and current years, top expensive cities with high price to rent ratio have been San Francisco, New York, Los Angeles, Washington D.C., Seattle, and Anaheim.
Related: Should I Use my Savings to Buy a Family Home or a Rental Property?
Price to Rent Ratio City Ranking for 2017 (U.S. Census Data)
Table 1: Top 10 Cities with HIGH P/R
| City | Price to Rent Ratio | Home Price (for a $1,000 Rental) |
| San Francisco, California | 45.9 | $550,560 |
| Honolulu, Hawaii | 40.1 | $481,320 |
| Oakland, California | 38.5 | $462,000 |
| Los Angeles, California | 38.0 | $456,240 |
| New York, New York | 35.7 | $427,800 |
| Seattle, Washington | 35.1 | $421,080 |
| San Jose, California | 34.7 | $416,640 |
| Long Beach, California | 34.6 | $415,200 |
| Washington, District of Columbia | 32.0 | $384,240 |
| Anaheim, California | 31.3 | $375,240 |
Table 2: Top 10 Cities with LOW P/R
| City | Price to Rent Ratio | Home Price (for a $1,000 Rental) |
| Detroit, Michigan | 6.3 | $75,000 |
| Cleveland, Ohio | 10.5 | $126,000 |
| Buffalo, New York | 10.7 | $128,000 |
| Pittsburgh, Pennsylvania | 12.0 | $144,000 |
| Memphis, Tennessee | 12.3 | $147,000 |
| Corpus Christi, Texas | 13.1 | $158,000 |
| Toledo, Ohio | 13.3 | $159,000 |
| San Antonio, Texas | 13.7 | $164,000 |
| Milwaukee, Wisconsin | 14.2 | $170,000 |
| Jacksonville, Florida | 14.3 | $172,000 |
Breaking Down the Price to rent Ratio in 2017
Cities that score a high P/R ratio (shown in Table 1) are too expensive to buy and show low ROI on rental property income. The average price to rent ratio of these cities is 36.6, thus renting makes more sense than buying (in financial terms). Long story short, these real estate markets do not favor owning investment properties because you may not get a good deal on the rental income.
On the opposite spectrum, the second table shows real estate markets with low price to rent ratio that are in favor of buying real estate and reaping high passive rental income in return. These 10 cities favor better rental property investment opportunities and high ROI. The average price to rent ratio of these cities is 12.0, which is below the threshold of buying as opposed to renting. In financial and economic terms, it makes more sense to invest in real estate in Cleveland rather than in Los Angeles.
Once the P/R ratio is calculated, you are in a better position to figure out whether or not it is financially rewarding to invest in a specific real estate market. Keep in mind, the price to rent ratio should not be the only indicator to evaluate the overall value of the real estate property in mind. There are many valuation methods real estate investors and realtors use to accumulate real financial returns on their real estate portfolio. Remember, there is no such thing as luck in real estate.
Related: How Does the US Housing Market Forecast Look Like for the Second Half of 2017?
When looking for your next investment property in the above-listed locations with low rent to price ratio, don’t forget to check out Mashvisor for numerous available real estate properties there.
