Whether you are a landlord or a renter, you definitely care about property prices, rental rates, and the ratio between the two in your market. Here we will show you the real estate markets across the US with the highest price-to-rent ratios in 2018.
This post was written by our partners at Mashvisor, who are making it easier for investors to find and analyze new real estate investments.
What is the Price-to-Rent Ratio?
It’s really a fancy name for a simple real estate concept. It shows the ratio of average property prices to average rents in a specific housing market. Just keep in mind that you should plug in the annual rent, not the monthly one.
How is it calculated?
Price to Rent Ratio Formula
Price to Rent Ratio = Average Property Price ÷ Average Annual Rent
Let’s take a look at an example:
Price to Rent Ratio Example: The San Antonio Real Estate Market:
According to data from Mashvisor, an advanced real estate data analytics company, in San Antonio in July 2018:
- Average Property Price: $301,000
- Average Monthly Rent: $1,530
Price-to-Rent Ratio in San Antonio = $301,000 ÷ (12 x $1,530) = 16
So the price-to-rent ratio in San Antonio this year is 16. But what does this mean for landlords and renters?
Is buying a rental property in San Antonio, TX a smart investment decision?
On the other hand, is it better to rent in San Antonio or to attempt to buy your own home?
What Does the Price-to-Rent Ratio Tell Us?
The price-to-rent ratio reveals whether it is better – from a purely financial standpoint – to buy your own home or to rent a property. This number shows how expensive (or not) it is to buy a property compared to renting one. Alternatively, it tells real estate investors how much rental demand they can expect in this market.
Some locations where it’s more expensive to buy rather than to rent will experience a high demand for rental properties. This is excellent news for property investors and a strong signal that they should explore their options for buying an investment property there.
Meanwhile, if it is relatively cheaper to buy a home rather than to rent one, the rental demand will below. This means real estate investors should generally avoid buying rental property in this location.
The price-to-rent ratio is divided into 3 ranges:
A price-to-rent ratio of 16 or below is considered low. For home buyers/renters, this ratio means that in this particular market people are better off buying a property rather than renting one. Investors, on the other hand, can expect low rental demand, so it’s best to stay away from this market.
16 – 20
A price-to-rent ratio in this range is relatively high, which means it is usually better to rent a property than to buy a home. Real estate investors can expect decent rental demand, so they should definitely look into buying an investment property in this market. However, they need to conduct careful neighborhood analysis and investment property analysis to make sure that they are investing in a positive cash flow income property in the right neighborhood.
Finally, a price-to-rent ratio of 21 and above is high. It tells renters to continue renting in this housing market as property prices to buy a home are too high compared to rental rates. Property investors, alternatively, are guaranteed high rental demand, which also means good rental income and positive cash flow.
What Are the Highest Price-to-Rent Ratio Real Estate Markets in the US in 2018?
Following are the housing markets in the US with the highest price-to-rent ratios in July 2018. All data comes from Mashvisor.
These markets will tell people living there or soon to move to one of them that renting a property rather than buying a home is the financially more pragmatic decision in those markets.
They will also tell investors looking for a location for their next rental property to pay special attention to these housing markets and explore the investment opportunities. High rental demand is definitely a great signal for property investors.
US Real Estate Markets with the Highest Price to Rent Ratio in July 2018
|City||Price to Rent Ratio||Average Property Price||Average Monthly Rent|
|2||Park City, UT||41||$980,900||$2,010|
|4||New York, NY||34||$1,144,500||$2,780|
|6||Palm Springs, CA||29||$604,000||$1,730|
|7||San Jose, CA||29||$1,065,400||$3,110|
|8||San Francisco, CA||28||$1,546,300||$4,520|
|11||Miami Beach, FL||27||$784,500||$2,400|
|13||San Diego, CA||26||$823,300||$2,670|
|16||New Orleans, LA||24||$416,800||$1,440|
|20||Las Vegas, NV||23||$359,200||$1,290|
|21||Long Beach, CA||23||$827,600||$3,050|
Source: Mashvisor, July 2018
As you can see from the data above, the property price level and the rental rates are equally important for determining the price-to-rent ratio in a particular housing market. Some of the markets with the highest price-to-rent ratios are notoriously famous for their high property prices, like San Francisco, Napa, and New York. While others like Charlotte, Sacramento, and Las Vegas are relatively affordable for homebuyers and real estate investors. However, what matters at the end of the day is that the rents there are even lower than the property prices, relatively speaking.
If you are a real estate investor looking to buy your next investment property in a market with high rental demand, focus your property search on these cities. Alternatively, if you live in or are moving to one of those cities, have no doubts that the right choice there is to rent a property rather than to buy your own home.
Author: Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool that helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months to do now can take 15 minutes. We provide all the real estate information in easy-to-understand visualizations.