Have you ever wondered “What is a good price to rent ratio in real estate investing?” Similar to many other crucially important real estate questions, this one doesn’t have a clear answer. The answer is: It depends on your key priorities and expectations as a real estate investor. Nevertheless, in this article we will attempt to figure out a few possible answers to help out beginners take their first steps in the exciting world of real estate investing.
Price to Rent Ratio Definition
Before we tackle “What is a good price to rent ratio for real estate investments?”, we need to have a look at another even more pressing matter: “What is price to rent ratio?”. Being new to property investments, you might have no idea.
Contrary to many other real estate metrics and concepts, this one is really easy to understand. In simple terms, the price to rent ratio is defined as the ratio between the average property price and the average rent per year in any housing market.
Price to Rent Ratio Formula
Price to Rent Ratio = Average Property Price/(Average Monthly Rent x 12)
Price to Rent Ratio Example
To help you fully grasp this metric, we will go over an example.
According to Mashvisor’s nationwide real estate data, the average property price in the Dallas real estate market in Q4 2019 equals $389,600, while the average monthly rent amounts to $1,800. Applying the formula above:
Price to Rent Ratio in Dallas, TX = $389,600/$1,800 x 12 = 18
And now what? Is this value high or low? Is 18 an ideal price to rent ratio for profitable renting out of investment properties in the Dallas housing market?
To understand what’s a good price to rent ratio, we need to go over these questions one by one.
Real estate experts break down this metric into 3 main categories:
1. Low: 0-15
2. Moderate: 16-20
3. High: 20+
Uses of the Metric in Real Estate
Traditionally the price to rent ratio is used by people when they have to decide whether to rent or buy in a housing market. A low ratio means that the prices of homes for sale are low compared to the prevailing rental rate, so buying a home makes perfect sense. Alternatively, when price to rent ratio is too high in a real estate market, residents are better off renting as property prices are just too expensive. In a moderate situation, renters/homebuyers have to be more careful, but generally speaking renting is the better option.
Real estate investors can also make use of the price to rent ratio by city when choosing the best places to invest in real estate. However, unlike with the 1% rule and the 2% rule in real estate or the cap rate and cash on cash return, there is no comprehensive response to the question “What is a good price to rent ratio for investing in rental properties?”
Nevertheless, this metric can give beginner real estate investors some indication of the rental demand and the return on investment they can expect in a particular housing market.
So, let’s have a look at the best price to rent ratio is for positive cash flow rental properties generating high profit.
Good Price to Rent Ratio for Real Estate Investing
Investing in Rental Properties in Markets with a High Ratio
Your intuition as a real estate market investor must be telling you that investing in the highest price to rent ratio markets is bad. It looks simple, right? High real estate listings prices combined with relatively low rental income mean bad return on investment, or even a negative cash flow investment property. However, things are rarely black and white in the world of property investments. A ratio of 21 and above can be a positive sign for investors as it is equivalent to strong rental demand for traditional rental properties in this US housing market. High rental demand means good occupancy rate and low vacancy rate, which translates into a good cap rate.
Related: The Top 6 Strategies to Boost Your Rental Income as a Real Estate Investor
For example, the price to rent ratio by city in the Austin, TX real estate market is 23, based on real estate market analysis done by Mashvisor. This is a rather high value at the city level, so experienced investors might expect not to find profitable rental properties in Austin. However, this Austin investment property generates a cap rate of 14.5% when rented out on long term basis, which is simply great. One of the reasons for this is the high traditional occupancy rate of 96% due to the high price to rent ratio in Austin.
Related: What Is Mashvisor? What Can It Do for Real Estate Investors?
This means that 20+ could be one of the answers to the question “What is a good price to rent ratio for investment properties?”
Buying an Investment Property in Locations with a Moderate Ratio
Demand for long term rentals in such housing markets is good, while houses for sale prices are not too high compared to rents. What this mean for real estate investors is that they can find some of the best rental properties to buy in these locations.
The Chicago real estate market has a moderate price to rent ratio of 18, according to real estate data analysis by Mashvisor. On our platform investors can find a bunch of top-performing investment properties, including this Chicago rental property, which has an excellent cap rate of 14.4%. This is the result of a relatively low property price ($155,000), low vacancy rate (6%), and good rental income ($1,152).
Investing in Real Estate in Places with a Low Ratio
The instincts of real estate investors tell them to aim for housing markets with a low price to rent ratio by city. With low property prices and high rents – relatively speaking – return on investment must be up. This can definitely be true, but investors need to look at the average occupancy rate before making a final decision. Such locations might suffer from weak rental demand as many people are buying homes rather than renting.
According to Mashvisor’s investment property calculator, the Atlanta real estate market has a ratio of 12, which is quite low. Nevertheless, this Atlanta investment property on Mashvisor’s platform enjoys an occupancy rate of 94%, resulting in a high cap rate of 17.4%.
To figure out the best US real estate markets for buying an investment property in 2020, read Price to Rent Ratio – Where to Invest in 2020.
Other Measures of Return on Investment
The conclusion we can draw from everything we’ve said so far is that the answer to “What is a good price to rent ratio for real estate investors?” is not a number, it is not even a range. Whether you will be able to find a profitable real estate investment property depends on many other factors including:
- Property prices
- Occupancy rate
- Vacancy rate
- Cash flow
- Cap rate
- Cash on cash return
You can find money-making rental properties in housing markets with low, moderate, and high price to rent ratio.
Beginner real estate investors will not be able to find a straightforward definition of what is a good price to rent ratio for rental properties. Instead of wasting energy on trying to figure this out, they can focus on getting the best real estate investment tools to help them buy a top-performing investment property in 2020. One of these tech-based tools is Mashvisor, where you can search through hundreds of thousands of homes for sale in all US markets to find the one that meets all your expectations including return on investment. Sign up for Mashvisor now to make 2020 a profitable one!