Choosing the best places to invest in a rental property depends greatly on rental demand in a certain location. If you are considering buying an investment property, a good starting point would be looking at price to rent ratio by city. This key real estate investing metric will help you locate the best real estate investments and will give you an idea about the expected return on investment. So, what is price to rent ratio and how should you use it when buying an investment property? This blog will not only answer all your questions but also show you the real estate markets with the highest price to rent ratio by city in the U.S in 2018.
Price to Rent Ratio: Definition
Price to rent ratio is a real estate metric that measures the relative affordability of buying or renting a real estate property in a given real estate market. Homebuyers are interested in price to rent ratio to decide whether to buy or rent a property in a given location, while for a real estate investor, this ratio is used as a guide to finding the best places to invest in a rental property. As a rule of thumb, a low price to rent ratio is more favorable among homebuyers, while a higher price to rent ratio indicates a cheaper environment for renters. Consequently, a higher price to rent ratio by city corresponds to a higher demand for rental properties. As a real estate investor, you should always look for investment properties in these locations to ensure a high return on investment and year-long occupancy.
Related: All You Need to Know About Price to Rent Ratio as a Real Estate Investor
Price to Rent Ratio: How to Calculate It
As the name implies, price to rent ratio is simply calculated by dividing the price of a real estate property by its annual rent. For a certain real estate market, it is calculated by dividing the average property price by the average annual rent.
Price to rent ratio = Average property price/ Average annual rent
For example, suppose that in a real estate market, a real estate property worth $250,000 is rented out for $1000 a month.
P/R = $250,000 / ($1000 X 12) = 20.83
But what does this mean? Is it a good real estate market to invest in?
Price to Rent Ratio: What Does It Mean?
As I mentioned earlier, the price to rent ratio is a real estate metric that helps homebuyers decide whether to buy or rent a real estate property. It also tells real estate investors if a given real estate market is good to invest in. But how does the price to rent ratio do that?
To understand better, price to rent ratio can be divided into three categories:
1- P/R ratio below 15: this indicates that in that real estate market, it is better to buy a home. Moreover, it tells real estate investors to avoid investing in such real estate markets as demand for rental properties is low and people prefer to buy than rent.
2- P/R ratio between 16 and 20: this is a neutral zone that means it is probably better to rent a property rather than buying one. As a real estate investor, you should consider such real estate markets where you can find good investing opportunities.
3- P/R ratio 21 and above: such real estate markets indicate that it is better to be a renter than a homebuyer. Therefore, real estate investors should focus on these markets since rental demand is expected to be high there.
Price to Rent Ratio by City: Where to Invest
Below is a list of cities with an average price to rent ratio above 21, based on U.S. census data calculated by SmartAsset. It should be noted that property values vary within the same city based on location and proximity to commercial centers.
San Francisco, California: 45.88
Honolulu, Hawaii: 40.11
Oakland, California: 38.5
Los Angeles, California: 38.02
New York, New York: 35.65
Seattle, Washington: 35.09
San Jose, California: 34.72
Long Beach, California: 34.6
Washington, District of Columbia: 32.02
Anaheim, California: 31.27
San Diego, California: 30.27
Portland, Oregon: 29.26
Boston, Massachusetts: 28.69
Jersey City, New Jersey: 26.34
Denver, Colorado: 26.01
Chula Vista, California: 25.81
Santa Ana, California: 25.25
Sacramento, California: 24.26
Miami, Florida: 23.36
Austin, Texas: 23.36
Atlanta, Georgia: 22.99
Colorado Springs, Colorado: 22.8
Bakersfield, California: 22.51
Raleigh, North Carolina: 22.37
Riverside, California: 22.35
Lexington, Kentucky: 22
Albuquerque, New Mexico: 21.9
Chicago, Illinois: 21.6
Henderson, Nevada: 21.55
Chandler, Arizona: 21.46
New Orleans, Louisiana: 21.36
Virginia Beach, Virginia: 21.12
Fresno, California: 21.03
Related: Top 10 Real Estate Markets for Buying Rental Property in 2018
Price to Rent Ratio by City: Where Not to Invest
Following the same logic, real estate investors should avoid buying a rental property in housing markets with a price to rent ratio below 15, because in these markets people find it more affordable to buy than rent a real estate property. We are not saying don’t invest in these cities, but if you do, make sure to invest in a type of rental property that is high in demand in those areas such as condominiums or Airbnb rentals.
Here’s a list of the lowest price to rent ratio by city:
Fort Worth, Texas: 14.77
Jacksonville, Florida: 14.34
Milwaukee, Wisconsin: 14.19
San Antonio, Texas: 13.68
Toledo, Ohio: 13.26
Corpus Christi, Texas: 13.14
Memphis, Tennessee: 12.26
Pittsburgh, Pennsylvania: 12
Buffalo, New York: 10.71
Cleveland, Ohio: 10.52
Detroit, Michigan: 6.27
Price to Rent Ratio: Is It Enough?
Investing in real estate markets with high price to rent ratio can be a good starting point when buying an investment property. However, using this real estate metric alone can be misleading since P/R ratio differs between various neighborhoods within the same city. While the price to rent ratio can tell a lot about demand for rental properties within a housing market, it neglects other important factors to look for when buying an investment property such as crime rate, population and economic growth. Additionally, it does not indicate whether a market is affordable or not. Accordingly, the highest P/R ratio in the U.S. is in San Francisco but the average property price for a rental there is around $550,000.
For more accurate real estate market analysis, use Mashvisor’s rental property calculator and other tools for neighborhood-specific price to rent ratios.
Related: Investment Property Calculator For Analyzing Real Estate Investments
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.