When thinking about where to invest in the US housing market 2020, there are several things you need to consider. This includes location, renter population, employment rates, crime rates, and median income levels. Another important factor to think about is the price to rent ratio for investment property. This is a metric that compares the price of property in a specific real estate market to the annual gross rent in the same market. Evaluating a real estate market to determine whether it has a low or high price to rent ratio helps real estate investors understand the relative affordability of renting vs. buying a house for local residents.
Related: All You Need to Know About Price to Rent Ratio as a Real Estate Investor
So, How Do You Calculate Price to Rent Ratio?
The home price to rent ratio formula is as follows:
Average property price/Average annual rent= Price to rent ratio
Let’s say you are thinking of buying a rental property in Shreveport, LA. According to Mashvisor’s real estate market data, the rent in the city is $1,090 per month (which adds up to $13,080 annually). The average price for homes is $277,276. Therefore, the price to rent ratio is:
277,276/$13,080 = 21
How Should You Interpret This Number? What Is a Good Price to Rent Ratio?
What is a good price to rent ratio? Is it a low or high price to rent ratio? There is no one-size-fits-all answer. It all depends on a wide range of factors, the most important of which is the real estate investor’s criteria when looking for the best places to buy rental property. A good ratio will also be determined by what you are looking for, your real estate investment strategy, and your budget.
Generally, the price to rent ratio falls in one of these three categories:
- Low price to rent ratio: 15 or below
- Moderate price to rent ratio: 16-20
- High price to rent ratio: 21 and above
Each category says something about the housing market:
A price to rent ratio of 15 and below shows that buying property is much cheaper compared to renting. This means that residents are more likely to own their own homes rather than live in a rental property. So it may be hard to maintain cash flow properties here as you might have problems finding a tenant. In such a market, the best real estate investment strategy would be fix-and-flip since investment properties are affordable and there are many buyers to choose from.
A moderate price to rent ratio indicates that the average price of real estate is a bit higher compared to renting. This means more of the population will be renting homes rather than buying their own. So investing in traditional rental properties would be a good idea in most cases.
Related: How to Use Price to Rent Ratio as a Real Estate Investor
How to Interpret a High Price to Rent Ratio
How should a real estate investor interpret a high price to rent ratio?
In a housing market with a high price to rent ratio, properties are too costly compared to monthly rents. As a result, most people choose to rent over homeownership. This means that with a high price to rent ratio, there will be a high rental demand for long-term rental property.
However, before rushing off and purchasing a property in a real estate market with a high price to rent ratio, there is a risk that you need to look out for. Even if a real estate investor can afford to purchase a rental property in this market, the property may not always be optimal. When home prices are too high compared to annual rents, generating a high return on investment will be difficult. For example, the average property price in the Longmont, Colorado real estate market is $657,202, with a high price to rent ratio of 27. However, the cash on cash return for the real estate market is a mere 1.2%.
Find investment properties with high cash on cash return in any real estate market, regardless of price to rent ratio, using Mashvisor’s Rental Property Finder. Try it out for yourself now.
11 Cities with the Highest Price to Rent Ratio in the US
Knowing the price to rent ratio by city in the US will give you an idea of where to invest in real estate. If you can afford it and have access to the right real estate investment tools to find high return property, investing in a market with high price to rent ratio could work for you. Here are the cities with the highest price to rent ratio:
1. Tuscaloosa, Alabama
Price-to-Rent Ratio: 51
- Median Property Price: $515,571
- Price/Square Foot: $3,143
- Traditional Rental Income: $842
- Days on the Market: 74
2. Montgomery, Alabama
Price-to-Rent Ratio: 36
- Median Property Price: $289,794
- Price/Square Foot: $111
- Traditional Rental Income: $673
- Days on the Market: 113
3. Pensacola, Florida
Price-to-Rent Ratio: 35
- Median Property Price: $511,246
- Price/Square Foot: $225
- Traditional Rental Income: $1,234
- Days on the Market: 127
4. Boulder, Colorado
Price-to-Rent Ratio: 34
- Median Property Price: $959,339
- Price/Square Foot: $475
- Traditional Rental Income: $2,336
- Days on the Market: 66
5. New York City, New York
Price-to-Rent Ratio: 34
- Median Property Price: $1,149,506
- Price/Square Foot: $624
- Traditional Rental Income: $2,815
- Days on the Market: 157
6. Boise, Idaho
Price-to-Rent Ratio: 34
- Median Property Price: $574,838
- Price/Square Foot: $254
- Traditional Rental Income: $1,414
- Days on the Market: 38
7. Santa Barbara, California
Price-to-Rent Ratio: 33
- Median Property Price: $1,612,955
- Price/Square Foot: $848
- Traditional Rental Income: $4,079
- Days on the Market: 157
8. Bend, Oregon
Price-to-Rent Ratio: 33
- Median Property Price: $ 710,310
- Price/Square Foot: $ 315
- Traditional Rental Income: $ 1,796
- Days on the Market: 127
9. Lake Oswego, Oregon
Price-to-Rent Ratio: 33
- Median Property Price: $1,068,358
- Price/Square Foot: $354
- Traditional Rental Income: $2,721
- Days on the Market: 77
10. Hilton Head Island, South Carolina
Price-to-Rent Ratio: 33
- Median Property Price: $662,021
- Price/Square Foot: $304
- Traditional Rental Income: $1,690
- Days on the Market: 113
11. Dennis, Massachusetts
Price-to-Rent Ratio: 32
- Median Property Price: $665,312
- Price/Square Foot: $347
- Traditional Rental Income: $1,708
- Days on the Market: 109
Ready to search for investment property now that you’ve seen the price to rent ratio by city?
Related: The Best Real Estate Markets to Invest in the US for Price to Rent Ratio
Conclusion
Though the price to rent ratio is an important metric to consider when thinking of where to invest in real estate, there are many other calculations you need to perform. These include net operating income, cash flow, cash on cash return, cap rate, and occupancy rate. Tools such as Mashvisor’s real estate heatmap and the investment property calculator will come in handy for these calculations.https://www.mashvisor.com/blog/2019-cap-rates-by-city/
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.