Whether you are a real estate investor looking to buy a rental property or someone deciding if it’s better to buy a home or rent a property, you need to know the price to rent ratio in your local housing market.
Here we will not only introduce you to the price to rent ratio, what it means, how to calculate it, and how to use it as a landlord and a tenant but also show you the real estate markets with the highest price to rent ratios across the US in the second quarter of 2018.
What Is the Price to Rent Ratio?
The price to rent ratio is a simple real estate metric which measures the relative affordability of buying a real estate property versus renting one. In order to calculate the price to rent ratio, you need two numbers: the average property price in the housing market under consideration and the average annual rent. The property price concept is quite straightforward, while you can obtain the annual rent by multiplying the monthly rent (from the point of view of a real estate investor) by 12.
Price to Rent Ratio = Average Property Price/Average Annual Rent
The human mind is set so that it learns best through examples, so let’s have a look at how to calculate the price to rent ratio in a specific US real estate market. Phoenix, AZ is the fifth most populous city in the US, so lots of people must be wondering whether it’s better to buy a home or rent one there. Moreover, a lot of other people must be considering if they should invest in real estate in Phoenix.
Let’s have a look at the price to rent ratio in the Phoenix real estate market. To make things easier, we will focus on 2-bedroom properties. The data that we will use comes from Mashvisor, a real estate analytics company which provides real estate information in easy visualizations to help investors find traditional and short-term investment properties quickly and efficiently.
The Phoenix Real Estate Market
- Average 2-Bedroom Property Price: $229,000
- Annual 2-Bedroom Property Rent: $13,700
Price to Rent Ratio = $229,000/$13,700
Price to Rent Ratio = 17
Now you must be wondering what this number 17 means after all. What is its significance to home buyers, to renters, to landlords, to real estate investors? To address your ponders, we will show you how the price to rent ratio should shape your decisions regardless of which side of the real estate market you stand on.
What Does the Price to Rent Ratio Mean?
As we said before, the price to rent ratio is a simple real estate metric which aims to tell you whether it’s better to buy a home or rent one in a certain housing market. Meanwhile, it also tells real estate investors whether buying a rental property in a certain real estate market is a good investment decision or not. But how does the price to rent ratio do that?
The price to rent ratio metric can be divided into three ranges:
- Below 15: A price to rent ratio of 15 or below means that it is better to buy a home in a certain market. Moreover, it tells real estate investors that this market is not a good investment option as properties are affordable enough for people to buy rather than rent them.
- 16-20: A price to rent ratio between 16 and 20, on the other hand, means that it is most probably better to rent a property rather than buy a home. Property investors should take a look at such markets as there might be good real estate investment opportunities there.
- 21 and above: A price to rent ratio of 21 and above, meanwhile, means that it is definitely better to be a renter rather than a homebuyer in this housing market. Real estate investors, alternatively, want to focus on these markets as high rental demand can be expected.
Highest Price to Rent Ratio Real Estate Markets in the US
Below is a list of the US real estate markets with the highest price to rent ratios at the moment. These are US cities where property prices are high compared to rental rates. This means that financially speaking, residents in these housing markets are currently better off renting a property rather than buying a home. In turn, it also means that real estate investors looking for the best places to buy an investment property in 2018 should focus on these cities.
The data used for calculating the price to rent ratios of these cities – including the average property price and the average rental rates – is provided by Mashvisor. Mashvisor’s investment property calculator gives investors easy access to real estate data on the city and neighborhood level as well as for specific investment properties across the US housing market.
Highest Average Price per Rent Ratio Real Estate Markets
| Real Estate Market | Average Price to Rent Ratio | 1-Bedroom Property Price to Rent Ratio | 2-Bedroom Property Price to Rent Ratio | 3-Bedroom Property Price to Rent Ratio | 4-Bedroom Property Price to Rent Ratio | |
| 1 | Santa Barbara, CA | 49 | 51 | 43 | 46 | 57 |
| 2 | Boston, MA | 39 | 30 | 39 | 43 | 46 |
| 3 | Napa, CA | 39 | 59 | 29 | 32 | 34 |
| 4 | Los Angeles, CA | 37 | 36 | 34 | 34 | 35 |
| 5 | New York, NY | 34 | 32 | 42 | 28 | 33 |
| 6 | San Francisco, CA | 31 | 26 | 31 | 30 | 39 |
| 7 | Pasadena, CA | 31 | 25 | 29 | 31 | 41 |
| 8 | Seattle, WA | 30 | 27 | 36 | 28 | 30 |
| 9 | Bend, OR | 30 | 25 | 37 | 28 | 29 |
| 10 | Boulder, CO | 29 | 23 | 24 | 31 | 37 |
| 11 | Miami, FL | 29 | 24 | 28 | 28 | 34 |
| 12 | Glendale, CA | 29 | 21 | 27 | 29 | 38 |
| 13 | New Orleans, LA | 28 | 26 | 30 | 25 | 32 |
| 14 | Jersey City, NJ | 28 | 29 | 31 | 27 | 23 |
| 15 | Nashville, TN | 27 | 30 | 24 | 22 | 31 |
| 16 | Austin, TX | 26 | 25 | 30 | 23 | 26 |
| 17 | Asheville, NC | 25 | 27 | 23 | 23 | 25 |
| 18 | Charleston, NC | 24 | 22 | 26 | 24 | 26 |
| 19 | Long Beach, CA | 24 | 21 | 22 | 24 | 30 |
| 20 | Salt Lake City, UT | 24 | 25 | 24 | 22 | 24 |
Data: Mashvisor, April 2018
These are the 21 real estate markets in the US which currently have the highest prices to rent ratios on average – i.e., considering all four types of properties as per number of bedrooms. However, there are some housing markets which exhibit remarkably high price to rent ratios for a specific property type and below average for other property types, and it’s only fair to mention them as well.
High Price to Rent Ratio Real Estate Markets for 1-Bedroom Properties
| Real Estate Market | 1-Bedroom Property Price to Rent Ratio | |
| 1 | Cincinnati, OH | 30 |
| 2 | Boise, ID | 29 |
| 3 | Pittsburgh, PA | 28 |
| 4 | Las Vegas, NV | 24 |
| 5 | Portland, OR | 23 |
Data: Mashvisor, April 2018
High Price to Rent Ratio Real Estate Markets for 2-Bedroom Properties
| Real Estate Market | 2-Bedroom Property Price to Rent Ratio | |
| 1 | Washington, DC | 28 |
| 2 | Buffalo, NY | 28 |
| 3 | Houston, TX | 25 |
| 4 | Pittsburgh, PA | 25 |
| 5 | San Diego, CA | 25 |
| 6 | Dallas, TX | 25 |
| 7 | Portland, OR | 24 |
| 8 | Fort Lauderdale, FL | 24 |
| 9 | Minneapolis, MN | 24 |
| 10 | Denver, CO | 23 |
| 11 | Atlanta, GA | 23 |
| 12 | Chicago, IL | 23 |
Data: Mashvisor, April 2018
High Price to Rent Ratio Real Estate Markets for 3-Bedroom Properties
| Real Estate Market | 3-Bedroom Property Price to Rent Ratio | |
| 1 | Palm Springs, CA | 28 |
| 2 | Naples, FL | 26 |
| 3 | Fort Lauderdale, FL | 26 |
| 4 | Chicago, IL | 26 |
| 5 | Houston, TX | 25 |
| 6 | Washington, DC | 25 |
| 7 | San Diego, CA | 25 |
| 8 | Denver, CO | 24 |
Data: Mashvisor, April 2018
High Price to Rent Ratio Real Estate Markets for 4-Bedroom Properties
| Real Estate Market | 4-Bedroom Property Price to Rent Ratio | |
| 1 | Naples, FL | 46 |
| 2 | Las Vegas, NV | 44 |
| 3 | Palm Springs, CA | 38 |
| 4 | Fort Lauderdale, FL | 36 |
| 5 | Scottsdale, AZ | 34 |
| 6 | Houston, TX | 30 |
| 7 | Irvine, CO | 29 |
| 8 | Fort Myers, FL | 28 |
| 9 | San Diego, CA | 28 |
| 10 | Chicago, IL | 27 |
| 11 | Cape Coral, FL | 26 |
| 12 | Washington, DC | 26 |
| 13 | Claremont, CA | 26 |
| 14 | Dallas, TX | 25 |
| 15 | Atlanta, GA | 24 |
| 16 | Denver, CO | 24 |
| 17 | San Jose, CA | 23 |
Data: Mashvisor, April 2018
Now you have the US real estate markets with the highest price to rent ratios in the second quarter of 2018. If you are someone pondering whether to buy a home or rent a property, it is definitely better to rent in these locations. If, on the other hand, you are a real estate investor thinking where to buy a rental property this year, these markets are among the best locations to invest in real estate in 2018 based on demand for rentals.
