When thinking of buying an investment property in a certain location, real estate investors first analyze the profitability of the said location to determine whether or not buying is a smart investment decision. Among the factors used in this real estate market analysis are property prices, rental rates, and the ratio between them. This is simply known as the price to rent ratio. In this article, we introduce this real estate investing metric and how to use it as a real estate investor as well as show you the real estate markets with the highest ratios across the United States in 2018.
What Is the Price to Rent Ratio?
In real estate investing, the price to rent ratio is a simple metric used to evaluate whether you should be buying a home vs. renting one from a financial point of view. While the price to rent ratio is usually used by homebuyers wondering whether they should buy or rent a house, it is also useful for real estate investors wondering where to invest in real estate.
To calculate the price to rent ratio, you simply take the average property price in the housing market and divide it by the average annual rent. Mashvisor is the best resource for this kind of data. With our rental property calculator, a real estate investor can see the median property price and rental income of investment properties in any city in the US housing market. To learn more about this tool, read this: Why You Should Consult a Rental Property Calculator First
For example, according to our investment property calculator, the median property price in Tampa, FL is $375,416, and the (traditional) rental income is $1,589. The price to rent ratio for the Tampa real estate market is:
$375,416 / ($1,589*12) = 19.6
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What does this number mean for real estate investors?
What Does Price to Rent Ratio Tell Investors?
The number that you get when calculating the price to rent ratio tells you different things. As a homebuyer, it reveals what is a better financial decision in a particular housing market – to buy and own your home or to rent one.
The situation is a bit more complicated for real estate investors. While the price to rent ratio tells you how expensive it is to buy an investment property in a market compared to the rental income you can expect to generate, it also tells you how strong the rental demand will be in this real estate market.
The locations where homes are expensive will have a higher rental demand because homebuyers can’t afford to buy them. Thus, though it might sound counterintuitive, real estate investors should explore their options for buying an investment property in such locations because of the strong demand for rental properties. High property prices defer homebuyers/renters from buying, but usually investors have more financing options to cover for higher property prices. On the other hand, they should avoid investing in locations where homebuyers find it more affordable to buy a home than rent one because the rental demand will be low there.
The price to rent ratio is divided into 3 ranges:
- Below 15 (Low): For homebuyers, this means that they are better off buying a property rather than renting one. Real estate investors, alternatively, will expect low rental demand, so it’s best to stay away from this market.
- From 16 to 20 (Relatively High): For homebuyers, this means it’s better to rent a property rather than to buy one. Real estate investors can expect decent rental demand, so they should definitely look into buying an investment property in this market.
- Above 21 (High): For homebuyers, this means they should continue renting in this housing market because property prices are too high compared to rental rates. Property investors, on the other hand, are guaranteed a high rental demand, which also means good rental income and possibly high positive cash flow.
Therefore, the best places for real estate investing could easily be those with a price to rent ratio above 21. If you’re a real estate investor or planning on buying your first rental property, you have to look for these markets and explore your options there! To find the best rental property in these locations, we recommend using a property finder tool like the one we provide.
With this real estate investing tool, property investors can filter their search results to find the most profitable properties that match their budget and rental strategy in the city/cities of their choice. Do you have a free Mashvisor account? Click here to use our Property Finder and find properties in a matter of minutes!
The Top Real Estate Markets with High Price to Rent Ratio in 2018
Note: The price to rent ratio data is taken from SmartAsset, while the median property price, rental income, and cap rate (for both traditional and Airbnb investments) are calculated using Mashvisor’s rental property calculator. To learn more about our product, click here.
San Francisco, CA (Price to Rent Ratio: 45.88)
- Median Property Price: $1,518,938
- Traditional Rental Income: $4,581
- Airbnb Rental Income: $6,362
- Traditional Cap Rate: 1.08%
- Airbnb Cap Rate: 2.18%
Honolulu, HI (Price to Rent Ratio: 40.11)
- Median Property Price: $939,665
- Traditional Rental Income: $2,650
- Airbnb Rental Income: $4,065
- Traditional Cap Rate: 2.4%
- Airbnb Cap Rate: 4.08%
Oakland, CA (Price to Rent Ratio: 38.5)
- Median Property Price: $858,692
- Traditional Rental Income: $3,391
- Airbnb Rental Income: $3,205
- Traditional Cap Rate: 1.35%
- Airbnb Cap Rate: 1.45%
Long Beach, CA (Price to Rent Ratio: 34.6)
- Median Property Price: $785,450
- Traditional Rental Income: $2,956
- Airbnb Rental Income: $3,245
- Traditional Cap Rate: 1.12%
- Airbnb Cap Rate: 1.53%
Washington, DC (Price to Rent Ratio: 32.02)
- Median Property Price: $639,646
- Traditional Rental Income: $2,653
- Airbnb Rental Income: $2,727
- Traditional Cap Rate: 2.17%
- Airbnb Cap Rate: 1.71%
Anaheim, CA (Price to Rent Ratio: 31.27)
- Median Property Price: $636,483
- Traditional Rental Income: $2,640
- Airbnb Rental Income: $5,221
- Traditional Cap Rate: 1.55%
- Airbnb Cap Rate: 5.27%
Note: The cap rates above are only city averages, which means that with Mashvisor you can find actual properties with significantly higher values.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
The Bottom Line
The price to rent ratio is a simple metric that property investors use to determine the rental demand, and thus, the potential of a real estate market to make money. The above cities with a price to rent ratio of above 21 offer a possibility for a good return on investment. Buying an investment property in such a market can take more time and effort in order to find a house at a reasonable price with good rental income, so investors should proceed with caution. Careful and diligent real estate market analysis and an investment property analysis are a must. Once investors find the right property in such a market, they are guaranteed occupancy.
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