Buying an investment property is one of the hardest decisions you’ll ever make. But it can also be one of the most financially rewarding ones.
There are so many questions to answer on your way to becoming a successful real estate investor:
- How do I buy an investment property?
- What investment strategy should I go with?
- What are the hottest markets for buying an investment property in 2018?
- How much money do I need to have in order to start a real estate investing business?
- Should I buy a rental property with a real estate agent or on my own?
- What are my responsibilities and rights as a landlord?
- How do I find good tenants and avoid bad ones?
- What about taxes? Tax deductions?
- What return on investment can I expect?
While it is impossible to answer all your questions in one single blog, here we will focus on helping you figure out the answer to one of them: “What are the hottest real estate markets for buying an investment property in the summer of 2018?”
Location Location Location
Many real estate experts say that these are the three most important words in real estate investing. On your journey to making money in real estate, you will hear over and over again that it is indeed better to buy a bad property in a good location than to buy a good property in a bad location. It makes sense, no? After all, you can’t really change the location of your rental property… unless you sell it and buy another investment property.
So, if you are thinking about buying an investment property in the summer of 2018, you have to choose one of the top real estate markets, i.e., the places with high rental demand from tenants.
But how do you know which US real estate markets have the highest rental demand at the moment?
You use the price to rent ratio!
What Is Price to Rent Ratio?
The price to rent ratio is a real estate metric which is easily calculated by dividing the average property price in a housing market by the average annual rent (the monthly rent times 12).
Price to Rent Ratio = Average Property Price/(Average Monthly Rent x 12)
How Do You Find the Best Real Estate Markets for Investment with the Price to Rent Ratio?
For most inexperienced real estate investors, the price to rent ratio is just a number. Knowing it has no real value unless you know how to use it. Actually, the price to rent ratio is quite easy to make use of when buying an investment property to rent out. Basically, you should aim at buying an investment property in a housing market which has a price to rent ratio of at least 16, but preferably even 21 or above.
But what’s the logic behind this?
From the point of view of renters, a price to rent ratio of:
- 15 and below means that it is better to buy a home rather than rent a property;
- 16-20 means that it is most likely better to rent a property rather than buy a home;
- 21 and above means that it is definitely better to rent a property rather than buy a home (because homes are too expensive in this particular market).
What does that mean for real estate investors?
It means that real estate markets with a price to rent ratio of 20 and above will have a very strong demand for rental properties, while those with a price to rent ratio of between 16-20 will still enjoy strong rental demand.
So, to help you locate the best place for buying an investment property in the summer of 2018, we have used our data at Mashvisor to show you the California real estate markets with the highest rent to price ratio.
Related: The Best Places in California to Buy an Investment Property in 2018
But why California, you may wonder?
The answer is simple: Because the California housing market features 7 out of the 20 markets with the highest rent to price ratios in the US right now. This means that the California real estate market is enjoying a strong rental demand, which is set to continue going up, considering the current trends in property prices.
What Are the California Real Estate Markets with the Highest Price to Rent Ratio?
Following are the 7 California real estate markets with the highest price to rent ratio in the spring of 2018, based on our Mashvisor data and calculations:
1. Santa Barbara
- Price to Rent Ratio: 49
- Average Property Price: $1,351,000
- Average Monthly Rent: $2,270
2. Napa
- Price to Rent Ratio: 39
- Average Property Price: $923,000
- Average Monthly Rent: $2,110
3. Los Angeles
- Price to Rent Ratio: 37
- Average Property Price: $969,000
- Average Monthly Rent: $2,140
Wondering where exactly to find the best real estate investment properties in the Los Angeles housing market? Read “Wondering Where to Buy a Rental Property in the Los Angeles Real Estate Market?”.
4. San Francisco
- Price to Rent Ratio: 31
- Average Property Price: $1,543,000
- Average Monthly Rent: $3,970
5. Pasadena
- Price to Rent Ratio: 31
- Average Property Price: $914,000
- Average Monthly Rent: $2,320
6. Glendale
- Price to Rent Ratio: 29
- Average Property Price: $801,000
- Average Monthly Rent: $2,330
7. Long Beach
- Price to Rent Ratio: 24
- Average Property Price: $637,000
- Average Monthly Rent: $2,120
How Can You Buy an Investment Property in These Markets?
If you are aspiring to become a real estate investor this year, you must be sitting there and wondering how it is even possible to afford buying a rental property in one of those cities. I mean, just look at the average property prices!!!
Well, that’s the exact reason why these housing markets have such high price to rent ratios – because real estate properties there are so expensive. That’s why rental demand there is high and will remain high in the years to come as most people simply cannot afford to buy a home there and have to resort to renting a property.
But things are different from the perspective of a real estate investor. You – as a future or current real estate investor – want to buy a property to rent out and make money out of it, not to live there. For you, real estate is a business. So, you have to make sure to always invest your money where you can achieve high return on investment to grow your real estate investment portfolio and make more and more money from your property investments.
The most straightforward way to do that is to focus on locations with high rental demand which is expected to continue in the years to come – the best places to invest in real estate.
But how about affording to buy an investment property in these markets?
As a real estate investor, you have plenty of options for financing your rental properties and buying properties with little or no money. To learn more about your options, read “Real Estate Investing for Beginners: Investing with Little or No Money”.
Just remember to always conduct investment property analysis (with the help of a rental property calculator like Mashvisor’s or without) to assure positive cash flow investment properties! After all, your goal as a real estate investor is to be making money, not losing money.
Buying an investment property and becoming a real estate investor is one of the most exciting and rewarding journeys you will ever embark on. But to make it a successful journey, remember to always invest your money in the best locations to buy rental properties and to make use of the available real estate market analysis tools. So, have a look at the California real estate markets with the highest price to rent ratio in 2018 and use Mashvisor’s investment property calculator and heatmap to make the best real estate investments.
To start out your 7-day free trial with Mashvisor to learn how to make the best real estate investments in the US housing market, click here.