Buying Investment PropertyWhere to Invest in 2018: Price to Rent Ratio by City by Abdallah Allabadi July 20, 2018August 12, 2018 by Abdallah Allabadi July 20, 2018August 12, 2018Choosing 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: DefinitionPrice 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 InvestorPrice to Rent Ratio: How to Calculate ItAs 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 rentFor 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) = 20.83But 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 InvestBelow 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: 45.88Honolulu, Hawaii: 40.11Oakland, California: 38.5Los Angeles, California: 38.02New York, New York: 35.65Seattle, Washington: 35.09San Jose, California: 34.72Long Beach, California: 34.6Washington, District of Columbia: 32.02Anaheim, California: 31.27San Diego, California: 30.27Portland, Oregon: 29.26Boston, Massachusetts: 28.69Jersey City, New Jersey: 26.34Denver, Colorado: 26.01Chula Vista, California: 25.81Santa Ana, California: 25.25Sacramento, California: 24.26Miami, Florida: 23.36Austin, Texas: 23.36Atlanta, Georgia: 22.99Colorado Springs, Colorado: 22.8Bakersfield, California: 22.51Raleigh, North Carolina: 22.37Riverside, California: 22.35Lexington, Kentucky: 22Albuquerque, New Mexico: 21.9Chicago, Illinois: 21.6Henderson, Nevada: 21.55Chandler, Arizona: 21.46New Orleans, Louisiana: 21.36Virginia Beach, Virginia: 21.12Fresno, California: 21.03Related: Top 10 Real Estate Markets for Buying Rental Property in 2018Price to Rent Ratio by City: Where Not to InvestFollowing the same logic, real estate investors should avoid buying rental properties 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: 14.77Jacksonville, Florida: 14.34Milwaukee, Wisconsin: 14.19San Antonio, Texas: 13.68Toledo, Ohio: 13.26Corpus Christi, Texas: 13.14Memphis, Tennessee: 12.26Pittsburgh, Pennsylvania: 12Buffalo, New York: 10.71Cleveland, Ohio: 10.52Detroit, Michigan: 6.27Price 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 InvestmentsTo 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 Start Your Investment Property Search! START FREE TRIAL Anaheim CAAtlanta GAAustin TXBakersfield CABoston MABuffalo NYChicago ILCleveland OHColorado Springs COCorpus Christi TXDenver CODetroit MIFort Worth TXFresno CAHonolulu HIJacksonville FLJersey City NJLexington KYLocationLong Beach CALos Angeles CAMemphis TNMiami FLMilwaukee WINew Orleans LAOakland CAPittsburgh PAPortland ORRaleigh NCRiverside CASacramento CASan Antonio TXSan Diego CASan Francisco CASan Jose CASeattle WAToledo OHVirginia Beach VAWashington DC 0FacebookTwitterGoogle +PinterestLinkedin Abdallah AllabadiAbdallah is a civil engineer with Masters in Real Estate and Facility Management. He focuses on writing about real estate analysis and the top locations for buying properties. Previous Post Question of the Day: What Is Real Estate Syndication? Next Post Airbnb Profit Calculator: What Is This and How Can You Make Money With It? 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