Do residents prefer to rent or buy a home? Investors must check the price to rent ratio by city to identify the best areas for long term rentals.
One of the best ways to invest in real estate is to own a long term rental property. Long term rentals provide steady cash flow and high returns. But, you must choose the right location to invest in. While rental demand in the United States is quite high, some areas may not be as optimal for investing as others.
Table of Contents
- What Is Price to Rent Ratio in Real Estate Investing?
- Cities With the Highest Price to Rent Ratios 2023
- Largest US Cities With Moderate Price to Rent Ratios 2023
- Locations With Low Price to Rent Ratio by City 2023
- How Can You Find the Price to Rent Ratios for Each City?
Before investing in short term rentals, you need to determine if residents prefer to rent or buy a home. The best way to find out the answer to this is to identify the price to rent ratio in a particular area. It shows the general sentiments of the residents in a location. It determines whether it’s more practical to buy a home or simply rent one.
In real estate investing, you can determine a good market by comparing the price to rent ratio by city. But a good price to rent ratio may not necessarily mean your long term rental will generate a positive cash flow.
You also need to consider other metrics when gauging a property’s profitability. Besides the price to rent, investors should also ensure that the location has a solid average cap rate. In general, cap rates of 2% or higher are considered good.
What Is Price to Rent Ratio in Real Estate Investing?
Before showing the best price to rent ratio cities, we have to first understand what price to rent ratio means in real estate.
The price to rent ratio is a financial metric used in real estate. It evaluates the relative affordability of buying versus renting a property.
A high price to rent ratio suggests that renting rather than buying a home may be more economical. A city with a high price to rent ratio means the cost of purchasing a property is relatively high compared to the potential rent.
Conversely, a low price to rent ratio indicates that buying may be more advantageous. This is because property prices are relatively more affordable compared to rental costs.
It’s important to note that the interpretation of the price to rent ratio can vary depending on the specific location. Certain real estate market conditions should also be considered. Different markets will have different average price to rent ratios. So, it’s crucial to consider other factors to get a more accurate assessment of a location’s potential rental profitability.
Price to Rent Ratio Formula
You can calculate the price to rent ratio by dividing the average home purchase price by the average annual rental income. The resulting ratio provides a benchmark that can be compared to historical averages. It can also assess the overall attractiveness of buying or renting in a particular housing market.
Here is the formula:
Price to Rent Ratio = Average Property Price / Average Annual Rental Rate
Where: Average Annual Rental Rate = Average Monthly Rental Rate x 12
For example, let’s consider the following real estate data from Mashvisor as of May 2023:
- Location: Piggott, AR
- Median Property Price: $212,360
- Average Monthly Rental Income: $875
Based on the given data above, the price to rent ratio in Piggott, AR, using the formula is:
- Price to Rent Ratio = $212,360 / ($875 x 12)
- Price to Rent Ratio = $212,360 / $10,500
- Price to Rent Ratio = 20
Per our computation, the price to rent ratio in Piggott, AR, as of May 2023 is 20. But what does this value mean?
What Is Considered a High Price to Rent Ratio?
We have already established that a high price to rent ratio typically suggests that buying a property may be less practical than renting. However, the threshold for what is considered high can vary depending on different factors. These factors include location, market conditions, and individual circumstances.
As a general guideline, experts consider a price to rent ratio of over 20 to be relatively high. It means that the purchase price of a property is more than 20 times the annual rental rate. Ratios in this range indicate that buying a property may be less financially advantageous compared to renting.
A high price to rent ratio means that the cost of purchasing is significantly higher than the potential rental income. From the investor’s point of view, a city with a high price to rent ratio is a good investment location. It means rental demand is high that investors can capitalize on it.
Experts consider a price to rent ratio of 1 to 15 to be relatively low. This range means that it’s more favorable to buy a house than rent one. It is because the purchase price is relatively lower compared to the average rental rate in a year. As an investor, you may benefit from the low property prices and high rent. But rental demand and occupancy would be challenging.
On the other hand, a price to rent ratio between 16 to 20 is moderate. It means that the property prices in a given housing market are neither low nor high compared to the rental rate. It’s often recommended to rent in a market with a medium price to rent ratio. In fact, this range is great for investors who want to capitalize on relatively affordable property prices.
Cities With the Highest Price to Rent Ratios 2023
To find the best rental property to invest in, you need to first determine the rent to price ratio by city. It allows you to identify which cities have the highest price to rent value across the United States. To help you with this, we listed the top 40 cities with high price to rent ratios.
We will only include cities with a cap rate of at least 3% mainly because the price to rent ratio by city should not be the only factor to consider when finding a good investment. The cap rate is also a good metric that will help you determine whether a location will make a good investment or not.
Top 40 Cities With High Price to Rent Ratios in 2023
Based on Mashvisor’s May 2023 real estate data, the top 40 best price to rent ratio cities are as follows:
|City||Price to Rent Ratio||Cap Rate|
|1. Enterprise, OR||81||3.16%|
|2. Big Timber, MT||80||3.03%|
|3. Meeker, OK||75||3.63%|
|4. Aurora, OH||50||3.09%|
|5. Waverly, GA||46||3.06%|
|6. Pacific, MO||45||3.12%|
|7. Cole Camp, MO||44||3.40%|
|8. Marion, OH||44||5.40%|
|9. Eustace, TX||43||3.31%|
|10. Decatur, AR||43||3.87%|
|11. Sparta, WI||41||3.83%|
|12. Trenton, GA||41||4.37%|
|13. Saint David, AZ||40||3.02%|
|14. Myrtle Point, OR||38||4.96%|
|15. Nathrop, CO||38||8.28%|
|16. Whitehouse, TX||38||3.27%|
|17. Wellington, FL||37||3.57%|
|18. Kimberling City, MO||36||3.24%|
|19. Mulberry, AR||36||3.76%|
|20. Del Norte, CO||36||3.89%|
|21. North Platte, NE||36||3.25%|
|22. Wister, OK||35||3.20%|
|23. Okemah, OK||35||3.18%|
|24. Diamond, MO||35||5.12%|
|25. Weston, MO||34||3.29%|
|26. Presque Isle, ME||34||3.67%|
|27. Lagrange, IN||34||4.05%|
|28. Beech Bluff, TN||34||3.35%|
|29. Kingston, PA||33||4.13%|
|30. Lantana, FL||32||3.19%|
|31. Locust Grove, OK||32||3.21%|
|32. Davis, WV||32||3.92%|
|33. Sunnyside, WA||32||4.72%|
|34. Scottsville, VA||32||3.31%|
|35. Crab Orchard, TN||32||3.84%|
|36. Pine Plains, NY||32||4.88%|
|37. Lancaster, VA||31||3.44%|
|38. Yellville, AR||31||4.31%|
|39. Greybull, WY||31||3.97%|
|40. Winfield, TN||31||4.36%|
Should You Buy a Rental Property at a High Price to Rent Ratio City?
A city with a high price to rent ratio is generally favorable to investors. In fact, if you plan to invest in long term rentals, you would want to look for markets with high price to rent values. But is it really a good idea to buy a rental property at a high price to rent ratio city? Let’s go over the advantages and disadvantages to understand what’s best for investors.
Advantages of Investing in a High Price to Rent Ratio City
Investing in cities with high price to rent ratios can be beneficial. This is because many residents would rather rent a home than buy one. Here are the other benefits of purchasing a long term rental property in a city with a high price to rent ratio:
High Rental Demand
Cities with high price to rent ratios often indicate a strong demand for rental properties. Various factors contribute to this demand. These include limited housing supply, a growing population, job opportunities, or desirable amenities and infrastructure. Investing in such cities is more likely to attract tenants, providing you with a steady income stream.
In general, high-priced cities often experience strong demand for housing. It can lead to the potential for property appreciation over time. If property values continue to rise, rental property investors can benefit from capital appreciation. It gives them the opportunity to sell the property for a profit in the future.
Lower Vacancy Rates
In cities with high demand for housing, rental properties generally have lower vacancy rates. This is because residents prefer to rent more than own a house. With an increased demand for rentals, investors are more likely to have a stable stream of rental income with fewer vacancy periods. It reduces the risk of income interruptions.
Disadvantages of Investing in a High Price to Rent Ratio City
While a city with a high price to rent ratio may seem desirable, there are some considerations that you need to know of. Before choosing to invest in an area with a high price to rent ratio by city, make sure to understand the risks involved. Here are a few drawbacks:
Investing in cities with high price to rent ratios can be financially demanding. Property prices may be considerably higher. It requires a larger upfront investment or a higher mortgage. This can make it more difficult to enter the market for first-time investors. Also, those with limited resources may be unable to afford investment properties in such cities.
Potential for Lower Cash Flow
It’s true that high rental demand can generate attractive rental income. But the higher purchase prices and operating costs may result in lower cash flow for rental property investors. Investors must carefully analyze expenses to ensure that rental income outweighs expenses. These include mortgage, interest rates, property taxes, maintenance costs, and other fees.
High-priced cities are not immune to market fluctuations. Property values in these markets can be more sensitive to economic downturns or changes in market conditions. Investors should be prepared for potential market volatility and the possibility of property values declining. These can affect their investment returns.
Largest US Cities With Moderate Price to Rent Ratios 2023
Many investors believe that the best cities for long term rentals are those with moderate price to rent ratios. These ratios range from 16 to 20. This is because the purchase prices are not that high, which means it’s possible for new investors to enter the market.
In our list below, we only included markets with cap rates of 3% or higher. It ensures that the markets have the potential to earn gainful returns.
Top 40 Cities With Moderate Price to Rent Ratios in 2023
Here is the list of the moderate price to rent ratio by city according to Mashvisor’s data as of 2023:
|City||Price to Rent Ratio||Cap Rate|
|1. Cockeysville, MD||20||3.31%|
|2. Chapin, SC||20||3.15%|
|3. Willow Springs, MO||20||4.70%|
|4. Little Rock, AR||20||3.46%|
|5. Hackberry, LA||20||3.11%|
|6. Pinnacle, NC||20||3.01%|
|7. Fall Branch, TN||20||3.77%|
|8. Mineola, TX||20||3.81%|
|9. Cushing, ME||20||3.17%|
|10. Sand Lake, MI||20||3.17%|
|11. Chandler, OK||20||3.81%|
|12. Port Angeles, WA||20||3.20%|
|13. Southold, NY||20||3.26%|
|14. Bristow, OK||20||3.03%|
|15. Port Royal, SC||20||3.72%|
|16. Aransas Pass, TX||20||3.55%|
|17. Bellevue, NE||20||3.17%|
|18. College Place, WA||20||3.27%|
|19. Tekoa, WA||20||3.32%|
|20. Fairfield, ID||20||3.46%|
|21. Spruce Pine, NC||20||3.71%|
|22. Joshua Tree, CA||20||3.52%|
|23. Tonganoxie, KS||20||3.33%|
|24. Fallon, NV||20||3.26%|
|25. Niota, TN||20||4.88%|
|26. Cedar Hill, TX||20||3.82%|
|27. Groesbeck, TX||20||3.26%|
|28. Sayre, PA||20||3.80%|
|29. Canton, TX||20||3.53%|
|30. Carencro, LA||20||3.75%|
|31. Ben Wheeler, TX||20||3.25%|
|32. Dennis Port, MA||20||3.78%|
|33. Metter, GA||20||3.24%|
|34. Burley, ID||20||3.71%|
|35. Merrill, OR||20||3.86%|
|36. Rossville, TN||20||3.35%|
|37. Chetek, WI||20||3.58%|
|38. Taft, TX||20||4.19%|
|39. Palo Cedro, CA||20||3.32%|
|40. Gillette, WY||20||4.27%|
Is It Best to Invest in Cities With Moderate Price to Rent Ratios?
Cities with moderate price to rent ratios are where most beginner real estate investors begin their investing journey. Ensure you understand the risks and benefits of investing in moderate price to rent cities.
Advantages of Investing in Moderate Price to Rent Cities
Here are the benefits of investing in cities with moderate price to rent ratios:
Moderate price to rent ratios indicate a relatively balanced affordability between buying and renting. It means investors can potentially find a good balance between property prices and rental income. This makes it easier to enter the market or expand their investment portfolio compared to cities with higher price to rent ratios.
Potential for Cash Flow
With moderate price to rent ratios, there is a higher likelihood of achieving positive cash flow. Rental rates are often sufficient to cover mortgage payments and property expenses—and generate profit. This can provide rental property investors with ongoing income while building equity in the property.
Reasonable Market Stability
Cities with moderate price to rent ratios tend to experience a reasonable level of market stability. They may be less susceptible to extreme market fluctuations. This is compared to cities with extremely high or low ratios. This stability can provide a sense of security for rental property investors. It minimizes the risk of significant declines in property values or rental demand.
Disadvantages of Investing in Moderate Price to Rent Cities
Here are the possible drawbacks of investing in cities with moderate price to rent ratios:
Limited Rental Income Growth
In cities with moderate price to rent ratios, the potential for rapid rental income growth may be somewhat limited. Rental rates may increase at a slower pace, making it challenging to significantly boost rental income over a short period. However, this can be mitigated by choosing locations with strong economic growth or other favorable factors.
These locations often attract a higher number of investors seeking a balance between affordability and rental income. This increased competition can make it more challenging to find suitable properties at reasonable prices. Investors may need to act quickly to secure good investment opportunities before they are snatched up by other buyers.
Potential for Slower Appreciation
While moderate price to rent ratios indicate a relatively balanced market, they may also mean that property appreciation rates are more moderate. Investors seeking rapid capital appreciation may find that property values increase at a slower pace. But this can be an advantage for long-term investors who prioritize stability and consistent returns.
Locations With Low Price to Rent Ratio by City 2023
Let’s look at some of the best price to rent ratio cities with the lowest price to rent ratio (15 and below). These are markets where traditional rental rates are less affordable than residential property values. In these places, it’s more practical to buy a house than rent one.
We only included cities with cap rates of over 3%.
40 Locations With Low Price to Rent Ratio by City in 2023
Here are the cities with low price to rent ratios based on Mashvisor’s data as of 2023:
|City||Price to Rent Ratio||Cap Rate|
|1. Old Fort, NC||15||4.71%|
|2. Hampden, ME||15||4.66%|
|3. Ladson, SC||15||4.66%|
|4. Stephens City, VA||15||4.45%|
|5. Montevallo, AL||15||4.37%|
|6. Canandaigua, NY||15||3.90%|
|7. East Bethel, MN||15||3.89%|
|8. Chesterfield, NH||15||3.74%|
|9. Franklin, NH||15||3.53%|
|10. Monroe, MI||15||3.47%|
|11. Lebanon, NH||15||3.20%|
|12. Summit, MS||15||5.77%|
|13. Adel, GA||15||5.34%|
|14. Selma, AL||15||4.69%|
|15. Oroville, CA||15||4.63%|
|16. Haslett, MI||15||3.64%|
|17. Des Allemands, LA||15||5.02%|
|18. Byron, MN||15||4.12%|
|19. Trumbull, CT||15||3.33%|
|20. Tazewell, TN||15||5.48%|
|21. Florence, AL||15||4.97%|
|22. Baton Rouge, AL||15||4.94%|
|23. Ligonier, IN||15||4.74%|
|24. Sudlersville, MD||15||4.57%|
|25. Mary Esther, FL||15||4.43%|
|26. Hollywood, FL||15||4.32%|
|27. Mascotte, FL||15||4.13%|
|28. Pleasant Hill, IA||15||4.01%|
|29. Cranston, RI||15||3.94%|
|30. Buna, TX||15||3.90%|
|31. Montgomery Village, MD||15||3.87%|
|32. Chittenango, NY||15||3.41%|
|33. Owensboro, KY||15||5.14%|
|34. Lynn Haven, FL||15||4.77%|
|35. Belton, MO||15||4.72%|
|36. Delano, MN||15||4.16%|
|37. Clear Lake, MN||15||4.06%|
|38. Middletown, NJ||15||3.70%|
|39. Hatboro, PA||15||3.60%|
|40. New Windsor, NY||15||3.40%|
When Is It a Good Idea to Invest in Low Price to Rent Ratio Cities?
Investing in cities with low price to rent ratios can be advantageous in certain situations. But they also have major drawbacks. It’s crucial to know the benefits and downsides before deciding to buy a rental property in these areas.
Potential Benefits of Investing in Low Price to Rent Ratio Cities
Here are some scenarios when it may be beneficial to consider investing in these cities:
Favorable Cash Flow
Low price to rent ratios often indicate that the cost of purchasing a property is relatively low compared to the potential rental income. It can result in favorable cash flow, where rental income exceeds expenses. Investors seeking immediate income generation and positive cash flow may find low price to rent ratio cities attractive.
Potential for Value Appreciation
While low price to rent ratios may suggest that property values are relatively affordable, there could still be potential for value appreciation over time. Investing in cities with growth potential can lead to future property appreciation. Investors who prioritize long-term capital appreciation may see opportunities in low-ratio cities where property values have the potential to rise.
Good for Buy-and-Hold Strategy
These cities can be suitable for investors with a buy-and-hold strategy. These investors focus on long-term wealth accumulation. They rely on rental income and property appreciation over time. By purchasing properties at a lower cost, investors can hold onto them for an extended period. They benefit from rental income and potential appreciation when market conditions improve.
Drawbacks of Investing in Cities With Low Price to Rent Ratios
It’s important to consider the potential drawbacks of investing in low price to rent ratio cities. You need to conduct thorough due diligence before investing in these markets. The risks can include:
Lower Rental Demand
Low price to rent ratios may indicate limited rental demand in certain areas. It’s crucial to evaluate the local rental market, job opportunities, population trends, and other factors. These can impact tenant demand and occupancy rates.
Possible Poor Economy
Investing in low price to rent ratio cities requires assessing the local economy and its growth potential. Regardless of the low price to rent ratios, areas with stagnant or declining economies may not offer favorable investment prospects.
Potential for Slower Appreciation
While low-priced properties may have the potential for future appreciation, the pace of appreciation may be slower compared to higher-ratio cities. Investors seeking rapid property value appreciation may find other markets more suitable.
How Can You Find the Price to Rent Ratios for Each City?
While you can try to do your own research and manually collect data to determine the city’s price to rent ratio, this process can be tedious and time-consuming. The best way to find accurate and up-to-date real estate information is by using an online platform like Mashvisor.
With Mashvisor, you can easily find the best long term and short term rentals for sale. Mashvisor offers several tools to help you locate the best markets for your preferred investment strategy. One of these tools is the Market Finder.
What Is Mashvisor’s Market Finder?
Market Finder lets you find the top markets based on your investment strategy. For example, if you plan to invest in Florida long term rentals, you just need to select the state from the map. Then, you will see the top markets for long term rentals based on different factors. These factors include the Mashmeter score, rental revenue, cap rate, and crime rate.
You will then see the optimal top markets for your chosen rental strategy. You can click on a specific market to see the important information you need. It includes the average monthly revenue and the median property price in the area. Using these two important data, you can calculate the price to rent ratio using the formula mentioned earlier.
Want to know how Market Finder works? Start your 7-day free trial with Mashvisor now!
When investing in real estate, knowing the profitability potential of a particular market is crucial to your success. Check the price to rent ratio by city while researching the best locations to invest in. Use the formula mentioned above to determine the price to rent ratio once you find the average purchase price and rental income.
Remember that there is no perfect ratio to follow. You need to consider other metrics, like cap rate, to identify the best places for long term rentals. Performing through research is recommended. However, manual research and analysis can be prone to error. Plus, it can also take too much of your time.
To make things easier, it’s best to work with a reliable real estate analytics platform to give you access to the data you need. Fortunately, Mashvisor is a one-stop platform that can help you throughout your investing journey.
From finding the best long term and best short term rental markets to analyzing the location and finding properties for sale, Mashvsior’s got you covered! Aside from Market Finder, Mashvisor’s Property Finder tool can help you search for properties for sale. The best thing about this is that you can set your own custom filters to find the perfect investment property.
Property Finder lets you set your preferred budget, property type, property size, and rental strategy. Then you will see a list of properties for sale that match your criteria. You can simply click on the property you like to see its complete real estate data. This way, you can easily analyze its profitability, helping you make an informed decision.
Start your real estate investing journey with Mashvisor. Schedule a demo today to learn more.