Making money in real estate is all about buying a top-performing rental property in one of the best locations for real estate investing. Easier said than done, right? There are so many ways to define the best places to invest in real estate and so many factors to take into consideration. Here we will have a look at the price to rent ratio by city to see on which US housing markets investors should be focusing in 2020.
Price to Rent Ratio in Real Estate
If you are a beginner investor, you might be wondering “What is price to rent ratio in real estate?” Unlike other real estate concepts, this one is very easy to define. The straightforward price to rent ratio definition is: The ratio between the average property price and the average rent in a given real estate market.
Price to Rent Ratio Formula:
Price to Rent Ratio = Average Property Price/Average Annual Rent = Average Property Price/(Average Monthly Rent x 12)
Real estate metrics are usually explained best with examples, so let’s try this approach here too:
Price to Rent Ratio by City Example:
According to real estate data from Mashvisor, the average property price in Los Angeles in Q4 2019 is $812,571, while the average monthly rental rate is $3,324.
Price to Rent Ratio by City in Los Angeles = $812,571/($3,324 x 12) = 20
Now that we know that the price to rent ratio in Los Angeles equals 20, what can we do with us as real estate investors? We’ll have a look at this in a bit.
Price to Rent Ratio Range:
Following is the widespread range for this metric:
- Low: 0-15
- Moderate: 16-20
- High: 21+
Uses of This Real Estate Metric
Renters and Homebuyers
Usually this number is something which renters and homebuyers use when deciding between rent vs. buy in a particular real estate market. A low ratio means that property prices are relatively low compared to the average rent, so buying a property makes more sense than renting. Alternatively, when the ratio is high, properties sell for more than what they rent for – comparatively speaking – so renting a property is the most reasonable choice. In a moderate market, it is harder to tell, but usually it makes more sense to rent rather than to buy.
Real Estate Investors
Real estate investors can also make use of price to rent ratio by city data when deciding whether buying an investment property in a certain real estate market is a good idea or not. The metric can also be used to highlight the best places to invest in real estate properties to rent out, depending on what an investor is looking for.
There is one more way in which property investors can use the price to rent ratio by city though it may sound a bit unorthodox. Knowing the price to rent ratio in your local real estate market can help you answer the question “How much can I rent my house for?” Just divide your investment property’s market value by the price to rent ratio, and you will get how much rent tenants would expect to pay per year in your location on average. While this might not be a precise rent and you may need to consider other factors, the number will give you at least an estimate of how much should I charge for rent.
Where to Find Real Estate Data on Price to Rent Ratio by City in 2020
Making the right real estate investing decision is easy once you have the right data. So, the question is where to find reliable, easily acceptable big data to make your real estate investment decisions quickly and confidently. The answer is Mashvisor.
One way to explore price to rent ratio by city in the US housing market is to find relevant articles on our blog. Another way is use the investment property calculator on our online platform. On the neighborhood pages, you can see the average property price and the average traditional rental income for any neighborhood in the US real estate market. Having these two numbers makes calculating the price to rent ratio by neighborhood really easy.
Best Places to Buy Rental Property in 2020 Based on Price to Rent Ratio by City
Now that you know basically everything there is to know about the price to rent ratio, it’s time to have a look at which markets make up for the best places to invest in real estate in 2020 based on this metric.
Real Estate Investing in High Price to Rent Ratio Markets
The most important benefit of buying a rental property in a housing market with a high price to rent ratio is the strong rental demand for traditional properties. When deciding whether to rent or buy, residents are more likely to go for renting, so the demand for long term rental properties is high.
As you can imagine, the return on investment might not be ideal as homes for sale are expensive compared to the average rent rate. If you plan to buy an investment property in such a location, you should do careful investment property analysis to assure positive cash flow and good return on investment in terms of both cap rate and cash on cash return. Using a real estate investment calculator is highly recommended.
Cities with the Highest Price to Rent Ratio in 2020
Note: The calculations of price to rent ratio by city below are provided by Mashvisor’s price to rent ratio calculator.
- Louisville, KY: 40
- Durham, CA: 35
- New York, NY: 33
- Honolulu, HI: 31
- Bend, OR: 31
- Boston, MA: 27
- Boise, ID: 26
- Scottsdale, AZ: 25
- Jersey City, NJ: 25
- Seattle, WA: 24
- San Diego, CA: 24
- Austin, TX: 23
- Washington, DC: 22
- Phoenix, AZ: 22
- Colorado Springs, CO: 22
- Charlotte, NC: 21
- Fort Lauderdale, FL: 21
Investing in Real Estate in Moderate Price to Rent Ratio Locations
Housing markets with moderate house to price rent ratio might be the best ones for investing in real estate. While demand for traditional investment properties is good, property prices are not too high compared to rent to prevent high return on investment.
There is no real con to buying an investment property in such a place, it all depends on the specific market and its peculiarities.
Markets with Moderate Price to Rent Ratio in 2020
- Nashville, TN: 20
- Los Angeles, CA: 20
- Sacramento, CA: 20
- Miami, FL: 19
- San Antonio, TX: 19
- Denver, CO; 19
- Tampa, FL: 18
- Philadelphia, PA: 18
- Dallas, TX: 18
- Chicago, IL: 18
- Houston, TX: 18
- Indianapolis, IN: 17
- Orlando, FL: 17
- Jacksonville, FL: 17
Real Estate Investments in Low Price to Rent Cities
The most important pro of buying a rental property in the cities with highest rent to price ratio is that you can make money in real estate on a big scale. If you buy low and rent high, your return on investment will be significant – as long as you manage to find tenants for your property.
If you are planning to invest in real estate in such a market, you should keep in mind that it might be difficult to find renters. As home values are low compared to rents, people will look for financing options to buy a home rather than rent. This low rental demand might lead to high vacancy rates and mess up your rate of return.
Locations with the Lowest Price to Rent Ratio in 2020
- Fort Worth, TX: 15
- Kissimmee, FL: 15
- Arlington, VA: 15
- Columbus, OH: 14
- Baltimore, MD: 14
- Milwaukee, WI: 14
- Detroit, MI: 14
- Palm Springs, CA: 13
- Portland, OR: 12
- Atlanta, GA: 12
- Syracuse, NY: 12
For comparison, you can have a look at 2019 Price to Rent Ratio by City: What Investors Should Expect.
What Else You Need to Consider When Investing in Real Estate
While the price to rent ratio by city is an important factor to keep in mind when buying an investment property, there are other things which are even more important. Beginner real estate investors should carefully consider:
- Property Prices
The median property price level in a city will determine whether this real estate market is affordable for you at all. Home values in many of the top locations for real estate investing in the US housing market in 2020 will exceed $1,000,000.
- Rental Rates
You should look at the rental income which you can expect to generate from your investment property in order to make sure that you will end up with a positive cash flow property right away. Investing in breaking even or negative cash flow properties is a big NO-NO in real estate.
- Property Taxes and Real Estate Laws
Before making an investment decision, you have to investigate the real estate tax levels as well as the landlord-tenant regulations in the local real estate market.
To help you out, here are The Top 5 States with No Property Tax in 2018.
You will also find reading Invest in Real Estate in the 5 Most Landlord Friendly States useful.
- Return on Investment
Last but not least, you have to get a reliable estimate of the return on investment which you can expect to make in this market. Always go for rental properties which promise a good cap rate and a good cash on cash return.
Good real estate investment decisions are those based on reliable data. Thus, there are many factors which a beginner real estate investor should consider when buying an investment property, and the price to rent ratio by city is one of them. While there is no clear answer to the question “What is a good price to rent ratio for real estate investing?”, this metric will help evaluate the rental demand and the return on investment in the local housing market.
If you need some extra help in finding profitable rental properties for sale across the US, sign up for Mashvisor now.