Real Estate Analysis What Does a High Price to Rent Ratio Mean in Real Estate Investing? by Charles Mburugu August 27, 2020August 26, 2020 by Charles Mburugu August 27, 2020August 26, 2020 When thinking about where to invest in the US housing market 2020, there are several things you need to consider. This includes location, renter population, employment rates, crime rates, and median income levels. Another important factor to think about is the price to rent ratio for investment property. This is a metric that compares the price of property in a specific real estate market to the annual gross rent in the same market. Evaluating a real estate market to determine whether it has a low or high price to rent ratio helps real estate investors understand the relative affordability of renting vs. buying a house for local residents. Related: All You Need to Know About Price to Rent Ratio as a Real Estate Investor So, How Do You Calculate Price to Rent Ratio? The home price to rent ratio formula is as follows: Average property price/Average annual rent= Price to rent ratio Let’s say you are thinking of buying a rental income property in Shreveport, LA. According to Mashvisor’s real estate market data, the rent in the city is $1,090 per month (which adds up to $13,080 annually). The average price for homes is $277,276. Therefore, the price to rent ratio is: 277,276/$13,080 = 21 How Should You Interpret This Number? What Is a Good Price to Rent Ratio? What is a good price to rent ratio? Is it a low or high price to rent ratio? There is no one-size-fits-all answer. It all depends on a wide range of factors, the most important of which is the real estate investor’s criteria when looking for the best places to buy rental property. A good ratio will also be determined by what you are looking for, your real estate investment strategy, and your budget. Generally, the price to rent ratio falls in one of these three categories: Low price to rent ratio: 15 or below Moderate price to rent ratio: 16-20 High price to rent ratio: 21 and above Each category says something about the housing market: A price to rent ratio of 15 and below shows that buying property is much cheaper compared to renting. This means that residents are more likely to own their own homes rather than live in a rental property. So it may be hard to maintain cash flow properties here as you might have problems finding a tenant. In such a market, the best real estate investment strategy would be fix-and-flip since investment properties are affordable and there are many buyers to choose from. A moderate price to rent ratio indicates that the average price of real estate is a bit higher compared to renting. This means more of the population will be renting homes rather than buying their own. So investing in traditional rental properties would be a good idea in most cases. Related: How to Use Price to Rent Ratio as a Real Estate Investor How to Interpret a High Price to Rent Ratio How should a real estate investor interpret a high price to rent ratio? In a housing market with a high price to rent ratio, properties are too costly compared to monthly rents. As a result, most people choose to rent over homeownership. This means that with a high price to rent ratio, there will be a high rental demand for long-term rental property. However, before rushing off and purchasing a property in a real estate market with a high price to rent ratio, there is a risk that you need to look out for. Even if a real estate investor can afford to purchase a rental property in this market, the property may not always be optimal. When home prices are too high compared to annual rents, generating a high return on investment will be difficult. For example, the average property price in the Longmont, Colorado real estate market is $657,202, with a high price to rent ratio of 27. However, the cash on cash return for the real estate market is a mere 1.2%. Find investment properties with high cash on cash return in any real estate market, regardless of price to rent ratio, using Mashvisor’s Rental Property Finder. Try it out for yourself now. 11 Cities with the Highest Price to Rent Ratio in the US Knowing the price to rent ratio by city in the US will give you an idea of where to invest in real estate. If you can afford it and have access to the right real estate investment tools to find high return property, investing in a market with high price to rent ratio could work for you. Here are the cities with the highest price to rent ratio: 1. Tuscaloosa, Alabama Price-to-Rent Ratio: 51 Median Property Price: $515,571 Price/Square Foot: $3,143 Traditional Rental Income: $842 Days on the Market: 74 2. Montgomery, Alabama Price-to-Rent Ratio: 36 Median Property Price: $289,794 Price/Square Foot: $111 Traditional Rental Income: $673 Days on the Market: 113 3. Pensacola, Florida Price-to-Rent Ratio: 35 Median Property Price: $511,246 Price/Square Foot: $225 Traditional Rental Income: $1,234 Days on the Market: 127 4. Boulder, Colorado Price-to-Rent Ratio: 34 Median Property Price: $959,339 Price/Square Foot: $475 Traditional Rental Income: $2,336 Days on the Market: 66 5. New York City, New York Price-to-Rent Ratio: 34 Median Property Price: $1,149,506 Price/Square Foot: $624 Traditional Rental Income: $2,815 Days on the Market: 157 6. Boise, Idaho Price-to-Rent Ratio: 34 Median Property Price: $574,838 Price/Square Foot: $254 Traditional Rental Income: $1,414 Days on the Market: 38 7. Santa Barbara, California Price-to-Rent Ratio: 33 Median Property Price: $1,612,955 Price/Square Foot: $848 Traditional Rental Income: $4,079 Days on the Market: 157 8. Bend, Oregon Price-to-Rent Ratio: 33 Median Property Price: $ 710,310 Price/Square Foot: $ 315 Traditional Rental Income: $ 1,796 Days on the Market: 127 9. Lake Oswego, Oregon Price-to-Rent Ratio: 33 Median Property Price: $1,068,358 Price/Square Foot: $354 Traditional Rental Income: $2,721 Days on the Market: 77 10. Hilton Head Island, South Carolina Price-to-Rent Ratio: 33 Median Property Price: $662,021 Price/Square Foot: $304 Traditional Rental Income: $1,690 Days on the Market: 113 11. Dennis, Massachusetts Price-to-Rent Ratio: 32 Median Property Price: $665,312 Price/Square Foot: $347 Traditional Rental Income: $1,708 Days on the Market: 109 Ready to search for investment property now that you’ve seen the price to rent ratio by city? Find a Profitable Traditional Rental Property Related: The Best Real Estate Markets to Invest in the US for Price to Rent Ratio Conclusion Though the price to rent ratio is an important metric to consider when thinking of where to invest in real estate, there are many other calculations you need to perform. These include net operating income, cash flow, cash on cash return, cap rate, and occupancy rate. Tools such as Mashvisor’s real estate heatmap and the investment property calculator will come in handy for these calculations. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here. Start Your Investment Property Search! START FREE TRIAL Market AnalysisPrice to Rent RatioProperty PricesRental RateShreveport LATraditional 0 FacebookTwitterGoogle +PinterestLinkedin Charles Mburugu Charles Mburugu is a HubSpot-certified content writer/marketer for B2B, B2C and SaaS companies. He loves writing on topics that help real estate investors and agents make better choices. Previous Post Where to Post Off Market Properties for Sale Next Post How to Use the Gross Rent Multiplier Formula Related Posts Worst Places to Invest in Real Estate: Avoid These Cities Do You Need Real Estate Investing Courses to Succeed in the Business? 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