When it comes to where to buy or where to rent, location is the number one factor. Knowing what location has the best rental value can aid in making a successful business decision for investors. The post-pandemic rise of the real estate market means it is a hot seller’s market across the US. So, where can landlords get the best deals and reap the greatest returns? Join us below as we review which cities have the best price-to-rent ratio!
What is the Price to Rent Ratio?
This ratio addresses the economic impact of buying versus renting in a particular location. Therefore, it compares the annual gross rent to the average sale price of local homes. That said, a higher ratio number indicates a market more favorable to renting, while lower numbers signal a great place to buy. This is especially helpful to investors as areas with affordability issues mean more demand for rental housing. Furthermore, investors can use this calculation and other financial metrics to compare various listings in the same area.
How to Calculate Price to Rent Ratio
Calculating home price versus rental value is a simple process demonstrated by the equation below –
Median Home Price / Median Annual Rent = Price to Rent Ratio
Real estate investors can utilize this easy calculation to gauge rental demand in a particular city or neighborhood. However, keep in mind that this ratio is not always a direct representation of affordability. Other factors such as median income are important in painting a complete picture of a location’s viability. Thus, if home prices in the area are out of reach for the average buyer, renting is the only option regardless of the ratio’s number.
Generally, price to rent ratio is classified into three categories – high, moderate, and low. Let’s examine each of those below.
- HIGH – A ratio score of 21 or above signifies that renting is better than buying in this particular location.
- MODERATE – Ratios of between 16 and 20 indicate it is typically better to rent than buy.
- LOW – Low ratios of 15 or below mean that buying a house is better than renting.
Top US Cities with the Highest Price-to-Rent Ratio
Despite the COVID-19 pandemic, the real estate market across the country is facing near-unprecedented demand. Thus, prices are soaring in many major cities as inventory struggles to keep pace with the number of buyers looking to take advantage of low-interest rates while they last. However, these rising prices make renting a more attractive option for those that cannot afford to buy or simply cannot find something to buy. Therefore, leaving investors a chance to capitalize on areas with a high ratio.
According to Zillow, the price-to-rent ratio in the US has steadily risen over the last several years. The downside in investing in markets with increased ratios is that the property prices will be higher. So, carefully weigh all of the standard cash flow metrics to determine if the property will have the returns you require. Check out these cities with a high price to rental value ratio below –
- New York, NY – Ratio of 33
- Honolulu, HI – Ratio of 31
- Boston, MA – Ratio of 27
- Boise, ID – Ratio of 26
- Scottsdale, AZ – Ratio of 25
- Jersey City, NJ – Ratio of 25
- Seattle, WA – Ratio of 24
- San Diego, CA – Ratio of 24
- Austin, TX – Ratio of 234464
- Washington, DC – Ratio of 22
Best Cities to Invest in with Moderate Price to Rent Ratios
Buy low, rent high – it is the goal of any investor looking to turn profits and build long-term wealth through income properties. So, looking for locations with a good balance of price and higher rental value means landlords can achieve a better return on investment. However, looking to neighborhoods with a more balanced ratio means investors will need to carefully select properties in areas with the rental demand needed to fill the property quickly. Let’s review a few places with great investment potential below –
- Milwaukee, WI – Ratio of 14
- Detroit, MI – Ratio of 14
- Fort Worth, TX – Ratio of 15
- Arlington, VA – Ratio of 15
- Baltimore, MD – Ratio of 15
- Indianapolis, IN – Ratio of 17
- Tampa, FL – Ratio of 18
- Philadelphia, PA – Ratio of 18
- Houston, TX – Ratio of 18
- Denver, CO – Ratio of 19
Best Places to Find Reliable Price to Rent Ratio Data
When trying to determine the price-to-rent ratio, accurate data is vital. Thankfully for landlords and investors, there are a few great online resources for up-to-date real estate data. Check out the top two websites for price-to-rent data below.
Zillow has quickly grown into one of the largest and most recognizable names in the real estate industry. Furthermore, Zillow provides a wealth of what location has the best rental value that investors need to analyze locations. Also, researchers can focus the data based on state, county, and even zip code or neighborhood. For example, some of the data Zillow provides includes –
- Real Estate Market News
- Local Home Prices and Value
- Market Forecasts
- Potential Rental Value Based on Address
- Current for Sale and Rental Listings
- Median Household Income
- Price to Income Ratio
National Economic and Real Estate Statistics
Once the data from Zillow is narrowed in on the area you need, adding historical data can produce telling patterns. Therefore, utilizing reports and statistics of an area over time helps compile a larger, more accurate picture of a specific area. To help in your search, check out these resources below for historical housing and economic data –
- The Bureau of Labor Statistics
- United States Department of Labor
- National Bureau of Economic Research
- S. Census Bureau
How to Ensure Success as a Landlord
For investors, finding an area with the right price-to-rent ratio is key, but only half the battle. Once a rental property becomes part of an investor’s portfolio, landlords must begin marketing and managing tenants. This process involves a lengthy list of daily tasks, including marketing, showings, tenant screening, preparing leasing contracts, and addressing maintenance needs, just to name a few. This endless array of tasks leaves many property owners looking for a more efficient alternative to ensuring their new investment remains profitable.
Thankfully, this is where a professional property management company can step in to offer owners the peace of mind they deserve. The trusted experts at Bay Property Management Group handle daily operations, tenant communication and ensure the property adheres to all local, state, and federal requirements and regulations. Give us a call today to find out more about our full-service approach to rental management!