Is Price to Rent Ratio a Better Metric?
Wise rental property investors are always looking for better software tools and analytics insights to gauge investment performance.
Some of these capabilities are built into property management software. In other cases, you may need to use an app or spreadsheet to assess and choose investment rental properties.
Knowing which properties, cities, and neighborhoods have better ROI can make or break investment portfolios. Price to Rent is just one key metric to measure yet investors are paying more attention to current ratios and future ratios. Even home owners are using it for their buy vs rent decision.
Simple Price/Rent Ratio Tells You a Lot
At the end of the last economic cycle, price to rent ratios were extremely high. The risks were high, especially for those who needed mortgages or financing. With high P/R ratios it’s not surprising that defaults from investors and home owners soon followed. The math didn’t add up.
Now that cap rates are flattening in this current economic cycle, many investors are suffering negative equity and negative cash flow, they need to figure out which properties to unload and which new types to buy.
Investors (and some property managers) look at a number of KPIs including Cap rates, rent yields, vacancy rates and property management fees/maintenance costs. There are 11 kpis that tell a complete story.
Price to Rent Ratio Formula
Price to Rent ratios (P/R) is one statistic investors are looking at. It’s simple yet very telling. The price-to-rent ratio is the ratio of home prices to annualized rent in a particular city or neighborhood.
The Formula P/R = (Property Price/12 months × Monthly Average Rent) = Ratio
As a rough, general example, here’s the ratios for Toronto, Los Angeles and the UK in their respective currencies:
Toronto: P/R = 807,871 / (12 × 2,206) = 30.5
UK: P/R = 628,458/ (12 × 924) = 56.7
Los Angeles: P/R = 675,200 / (12 × 2,251) = 25
LA residents might be surprised to learn their rents are comparatively lower than other major cities. An investor might shy away from buying flats in London, and instead look closer at California’s up and coming cities.
Price to rent ratios vary wildly from neighborhood to neighborhood so you’ll need to drill down into potential communities and zip codes to assess the best ones.
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In the best cities to buy property post, you’ll see which US cities provide the best price to rent ratios. It’s probably not a surprise to see Detroit and other midwest cities having the highest Price to Rent ratios. If cap rates are flat, rental property income is now driving investment value.
See a complete list of the US cities with the best price to rent ratios.
Rent to Price Ratio – Higher is Better
You can switch the formula around to assess rent over price.
|City||Rent to Price|
|Home Price||Average Rent Price|
|New York, New York||1.30%||$307,800||$4,079|
|Buffalo, New York||1.20%||$81,500||$1,016|
With the repatriation of jobs back to the US continuing, the midwest cities could enjoy even higher ratios. This is because investors often buy before there is upward pressure on rents. As these city’s economies improve, employment grows, populations grow, wages improve, and housing availability drops. Then rents will rise until sufficient new multifamily developments are built to fulfill demand.
And there are political factors too that drive up rent prices. Take a good look at the top performance kpis for rental properties and you’ll be able to look ahead at where you’ll derive your returns.
Property management is evolving quickly. Please see other posts on improving rental yields, tenant screening, property management accounting, and Mobile Property Management.
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