If you’re looking for places to purchase properties in 2021, there are certain factors you must consider before investing. One of the most important factors to consider is the price-rent ratio. The price-rent ratio is an easily understandable real estate concept that defines the ratio between average property price and average rent in a given real estate investment market.
In this article, we will look at the price-rent ratio by the city in the US so investors know which markets to focus on in 2021.
- 1 Definition
- 2 Price-rent ratio range
- 3 Where To Find Real Estate Data
- 4 Best Places To Buy Rental Property In 2021 Based On Price-To-Rent
- 5 List of all 70 Top Cities with Price-to-Rent Ratio and Rental Yields
- 6 Who Can Benefit From This Data
- 7 Other Factors To Consider When Investing in Real Estate
Price-rent ratio = Average Property Price/Average Annual Rent
Price-rent ratio = Average Property Price/(Average Monthly Rent * 12)
An example of the above formula in use is:
According to real estate data from our datasets, the average price of a property in Columbus, OH for Q4 was $192,000, with an average monthly rent of $1,100.
Price to rent ratio in Columbus, OH = $192,000/($1,100*12) = 14.5
Now that we know price-rent ratio in Columbus is 14,5, what do we do with the information? We’ll determine this in a jiffy.
Price-rent ratio range
The range below describes the above metric and how it can be used to compare one city with another:
- Low: 0-15
- Moderate: 16-20
- High: 21+
Where To Find Real Estate Data
With the right data, you can make a real estate investment decision easily. However, you will need to determine where you can get accurate data on the properties and locations, you’re interested in. Zillow has sufficient data that’s as well accurate.
You can find accurate data on top 70 cities/metro areas below.
Best Places To Buy Rental Property In 2021 Based On Price-To-Rent
Since you now understand all there is to know about price-rent ratio, we now have to consider the ideal markets for investment in 2021 based on this metric.
Real Estate Investment In The High Price-Rent Ratio Markets
The most obvious benefit of purchasing a rental property in a housing market with the high price-rent ratio is the strong demand for rental properties which creates a long-term demand for these properties.
The most obvious issue is that return on investment of these properties’ won’t be as high as the average. Therefore, if you plan to purchase property in a high price-rent location, ensure you guarantee cashflow and return on investment in terms of cap rate and cash on cash returns. Using a real estate analysis tool is essential in guiding this process.
Examples of Cities with the Highest Price-Rent Ratio:
- San Jose, CA: 32.90
- Honolulu, HI: 21.6
Real Estate Investment In The Moderate Price-Rent Ratio Markets
Real estate locations with moderate price-rent ratios may be the best places to invest as demand is good in these locations, the price of properties is not so high – allowing for a decent return on investment.
There are no real disadvantages to purchasing properties in these locations, although it might depend on the specific market and its peculiarities.
Examples of Cities with Moderate Price-Rent Ratio:
- Colorado Springs, CO: 20.3
- Sacramento, CA: 20.2
- San Diego, CA: 20.1
- Salt Lake City, Utah: 19.9
- Bakersfield, CA: 18.8
- Tucson, AZ: 18.5
- Portland, OR: 18.4
- Las Vegas, NV: 18.3
- Phoenix, AZ: 17.7
- Seattle, WA: 17.1
- Denver, CO: 17.1
- Detroit, MI: 16.5
- Albuquerque, NM: 16.0
Real Estate Investment In The Lowest Price-Rent Ratio Markets
The biggest advantage of buying a property in cities with the lowest price-rent ratio is that you stand to make huge profits as your return on investment is the highest. As long as your marketing is done right and you continue to find tenants, you have no problems.
If you plan on purchasing a property in a low price-rent ratio area, you should keep in mind that finding good quality renters might pose a challenge. As home value is low compared to rent, you will find more persons looking to buy than to rent, which could mess up your returns.
Examples of Cities with Moderate Price to Rent Ratio:
- Austin, TX: 15.9
- Jacksonville, FL: 15.5
- Nashville, TN: 15.3
- Louisville, KY: 14.9
- Oklahoma City, OK: 14.8
- Omaha, NE: 14.6
- Columbus, OH: 14.5
- Orlando, FL: 14.0
- Richmond, VA: 14.0
- Memphis, TN: 13.6
- Milwaukee, WI: 13.5
- Charlotte, NC: 13.4
- El Paso, TX: 13.1
- Baltimore, MD: 12.7
List of all 70 Top Cities with Price-to-Rent Ratio and Rental Yields
Below is the Airtable list of the cities for you to scroll and check for yourself:
Who Can Benefit From This Data
Renters and Home Buyers
The price-to-rent ratio is a purchase metric buyers use when deciding between rent vs buy in a specific real estate market. A low ratio means property prices are low relative to the average rent, making buying a better option to renting. However, renting becomes the more reasonable choice when the ratio is high since properties sell for more than they rent for. It’s a little difficult to determine in a moderate market – which is the better option, but usually, it pays more to rent than buy.
Read Also: Is Real Estate Debt really That Bad?
Real Estate Investors
Real estate investors can use the price-rent ratio by city-data when making a real estate purchase decision. The metric can also identify the best places to live, depending on the buyer. Another way a real estate investor can use the price to rent ratio is in determining for how much he’ll rent out a house for. To do this, you divide your investment property’s market value by the price-rent ratio, and this will give you an idea of the average rent customers in that area would expect to pay. While this will not give you the precise rent, it will estimate what you will charge after considering other factors.
Other Factors To Consider When Investing in Real Estate
While the price-rent ratio is an important factor to consider, there are several other things to consider. Beginner real estate investors should also consider:
Price of properties
The average cost of property in a particular area will determine whether the real estate market is affordable for you. In some top locations in the US, the cost of real estate will exceed $1,000,000.
Rents / Cash flow
Before purchasing property, you should consider the income you can expect to get from your investment, so the cash flow is guaranteed. Investing in unprofitable or break-even properties in real estate is never recommended.
Local real estate laws
When considering a real estate investment, you will need to get information on landlord-tenant regulations in the area and existing tax levels.
Return on investment
Finally, you need to have an idea on potential returns from any real estate investment you will be making before you venture into it. Target properties that promise good cap rates and cash on cash returns.
The fact remains that you need good data to make smart investments. There are several factors to consider when making a real estate investment decision, and the price-rent ratio is one of many. Although there’s no clear answer to what a good price-rent ratio may be, having the metric will help you make better decisions.