Whether you’re a beginner or an experienced real estate investor, you know that where you invest is the most important factor for successful real estate investing. Investors typically rely on a number of metrics to analyze housing markets and identify the best places to invest. Some of these metrics are the cap rate, cash on cash return, and the price to rent ratio. In this blog, we’re going to explain why this last metric is used when buying a rental property as well as provide a list of the price to rent ratio by city for the major cities in the US housing market to help you decide whether your city of choice is a good place to invest in real estate in 2019.
Related: 10 Best Places to Invest in Real Estate in 2019
What Is the Price to Rent Ratio?
As mentioned, the price to rent ratio is one of the real estate metrics that investors use when studying if a certain city or housing market is a good place to invest in rental properties. Basically, it measures the relative affordability of renting and buying by calculating the ratio between the average sales price and the average annual rent in the city. So, the formula to calculate the price to rent ratio is simply:
Price to Rent Ratio = Average Property Sales Price/Average Annual Rent Price
We typically see renters and homebuyers use this formula to decide what makes more financial sense: to keep renting a home or to buy one. It’s the most straightforward way to see how affordable property prices are in comparison with rents. However, savvy real estate investors also calculate the price to rent ratio before buying a rental property in a given housing market.
First off, it’ll give you data to whether it might be a good or a horrible time to invest in real estate in your city of choice. Also, by looking at the price to rent ratio by city, you’ll get comparative data on neighboring cities. This should help you in analyzing and comparing different markets to find the best place to buy an investment property in 2019. This won’t tell you everything, but it’s a great starting point to making more informed real estate investment decisions.
What Is a Good Price to Rent Ratio?
As a general rule, the price to rent ratio is classified into three ranges:
- Low (15 and below): It’s better to buy a house than to rent one
- Moderate (16-20): It’s usually better to rent than to buy a house
- High (21 and above): It’s definitely better to rent a house than to buy one
Therefore, there isn’t really a specific number that represents a good or “the best” price to rent ratio for rental property. A good ratio depends on what you’re specifically looking for in a location as a real estate investor. For example, do you want to invest in the most affordable housing markets in the US or in cities with the highest demand for rental properties? Each investor has different criteria and the price to rent ratio should be included there. Meaning, you should decide what ratio are you looking for in your city of choice for real estate investing: low, moderate, or high.
Related: All You Need to Know About Price to Rent Ratio as a Real Estate Investor
To help you out, we’ve looked at our data for the price to rent ratio by city in the US housing market and listed them in these three categories. We also point out some pros and cons of investing in cities in each category to further help you understand why it’s better to buy rental properties in certain cities than in others. This data is provided to you by Mashvisor’s Investment Property Calculator – the ultimate tool for real estate investors to find and analyze investment properties in any city or neighborhood in the US housing market. To learn more about our product, click here.
Low Price to Rent Ratio by City
- Baltimore, MD: 13
- Detroit, MI: 15
- San Antonio, TX: 15
A price to rent ratio below 15 indicates that it’s better to buy a home because prices are cheap compared to rents in that city. As a result, rental demand may not be as strong as it is in other real estate markets, which is a disadvantage to real estate investors. However, there are some advantages to buying in cities with the lowest price to rent ratio. Because property prices are cheap, these are good places to consider if you’re planning on buying investment properties in cash instead of taking out a mortgage.
Also, our data shows that the monthly rental income in these cities is actually quite high. Meaning, if you find a renter for your rental property, you’ll get positive cash flow and good cash on cash return. Looking for properties for sale in these cities with high potential for a good return? Sign up to Mashvisor and use the Property Finder Tool to find what you’re looking for in a matter of minutes!
Moderate Price to Rent Ratio by City
- Milwaukee, WI: 16
- Indianapolis, IN: 16
- Columbus, OH: 17
- Orlando, FL: 17
- Bakersfield, CA: 17
- Minneapolis, MN: 17
- Philadelphia, PA: 18
- Houston, TX: 18
- Pittsburgh, PA: 18
- Atlanta, GA: 18
- Jacksonville, FL: 18
- Chicago, IL: 18
- Tampa, FL: 19
- Scottsdale, AZ: 19
- Dallas, TX: 19
- Miami, FL: 20
- Virginia Beach, VA: 20
- Denver, CO: 20
- Durham, NC: 20
A price to rent ratio between 16 and 20 is neutral territory where it’s probably better to rent a house rather than to buy one. This is because prices are rather high compared to rents. For investors, this means there’s a higher demand for rentals in these cities, making them better places to invest in real estate than those in the previous category.
As a matter of fact, when you take a close look at the list, you’ll realize that many of these cities have been named as the best cities for buying investment properties in 2019 by numerous reports. Take Dallas, for example – the PwC’s Emerging Trends in Real Estate Report named it the #1 housing market to watch this year! However, we should note that the price to rent ratio by city doesn’t take into account how each neighborhood is performing in the city. So, you need to conduct a neighborhood analysis to ensure buying properties in good locations.
You can easily do that using Mashvisor’s Heatmap! With this investment tool, real estate investors can see how different neighborhoods in their city of choice are performing based on important real estate metrics like the cap rate, cash on cash return, and rental income. This allows you to identify which neighborhoods are performing better than others and which offer better investment opportunities.
To start your neighborhood analysis and analyze investment properties in your city/neighborhood of choice, click here.
High Price to Rent Ratio by City
- Nashville, TN: 21
- New Orleans, LA: 21
- Grand Rapids, MI: 21
- Richmond, VA: 22
- Memphis, TN: 22
- Austin, TX: 22
- Charlotte, NC: 22
- Sacramento, CA: 22
- Washington, DC: 22
- Phoenix, AZ: 23
- Raleigh, NC: 23
- Las Vegas, NV: 23
- Los Angeles, CA: 24
- San Diego, CA: 25
- Seattle, WA: 25
- Boston, MA: 29
- San Francisco, CA: 31
- New York, NY: 33
A price to rent ratio by city above 21 tells renters/homebuyers that it’s certainly more affordable to rent than to buy a house. Prices of homes for sale are too expensive compared to rents and, thus, real estate investors will see strong rental demand. The fact that there are more major cities with a high price to rent ratio than a low one indicates that more people will be renting rather than buying a house in the US housing market in 2019. This is good news for real estate investors as it tells you that if you invest in the right location, you’ll have a strong demand for your rental property.
For more details, read our Report: It’s More Affordable to Rent than Buy a House in 2019.
However, there are a few disadvantages to investing here besides the higher prices. First, the rental income generated from investment properties here may not be enough to cover expenses. If you don’t do your due diligence and run the numbers carefully, you’ll end up buying a property that costs more than what it earns. Second, some of these housing markets are very completive with both domestic and foreign investors looking to invest here. Meaning, beginners may have a hard time in these markets.
What Else to Know Before Investing in 2019
While knowing the price to rent ratio by city is useful for comparing locations and deciding where to invest in real estate, it doesn’t reflect the overall affordability of the housing market. Take New York as an example. It has the highest price to rent ratio in the country, indicating that renting should be more affordable than buying. However, rentals in New York are also expensive. The city’s high price to rent ratio only reflects that buying is more expensive than renting within the city.
It doesn’t say anything about the overall affordability of housing compared to other cities. It also doesn’t say anything about economic growth, crime rate, if it’s a seller’s or buyer’s market, and other factors that make for a good place to invest in real estate. It’s up to you, the real estate investor, to do your due diligence and research these trends to determine how the housing market is performing.
Moreover, the price to rent ratio is not the only metric to calculate before making an investment decision. As mentioned, it’s only one of many including cap rate and cash on cash return which are the two most important metrics to calculate the rate of return on rental properties. You can use Mashvisor’s Investment Property Calculator and other tools to get more accurate data besides the price to rent ratio by city. Start out your 7-day free trial with Mashvisor now to see for yourself!