Key points The price/rent ratio is calculated by dividing the average house price by the average annual rent. A price-to-rent ratio of 15 or less means it is better to buy. A price-to-rent ratio of 21 or more means it is better to rent. The price-to-rent ratio is a quick and easy calculation that compares the average house price to the average annual rent.
Using the price/rent ratio metric, real estate investors can select areas that may be good areas to invest in rental properties. The price-to-rent ratio compares the annualised gross rent in a specific area with the price of homes in the same area. Investors use the price-to-rent ratio as a metric to determine whether it is more profitable for someone to buy or rent a property. Like the 1% rule, the 2n rule of thumb in real estate can help investors measure the relationship between price and rent.
This rule of thumb uses the same idea as the 1 per cent rule. However, the 2 per cent rule suggests that a rental property is a good investment if the rent money each month is equal to or more than 2 per cent of the purchase price. By dividing the average house price by the average annual market rent, an investor in rental properties can know the affordability (i.e. the price of rent).
However, for rent to be considered income, he or she must have a two-year track record of managing investment properties, purchase rental loss insurance for at least six months of gross monthly rent, and any negative rental income from any rental property must be considered debt in the debt-to-income ratio. In areas where the price-to-rent ratio is low, people may find it more attractive to buy rather than rent, which can lead to low demand for rental properties. However, unlike the 1% rule and the 2n rule in real estate or the capitalisation rate and cash yield, there is no global answer to the question "What is a good price/rent ratio for investing in rental property? The price/rent ratio is only one of several formulas that investors should use to analyse the financial performance of single-family rental properties. Specifically, the metric can be reverse engineered to identify the best places for investors to buy rental properties.
Money-making rental properties can be found in real estate markets with low, moderate and high price-to-rent ratios. Beginning real estate investors will not be able to find a straightforward definition of what is a good price-to-rent ratio for rental properties. A more valuable figure than the gross rental yield is the capitalisation rate, also known as the capitalisation rate or net rental yield, because this figure includes the operating expenses of the property. Instead of buying a single house in San Jose, you could own several rental properties in different markets around the country where prices are more affordable and price/rent ratios remain attractive.
The price/rent ratio is a simple calculation that real estate investors use to estimate the potential demand for rental properties. Postcodes within the target market that have a price/rent ratio above 8.3 may be good for rental property investment because the higher the price/rent ratio, the more attractive an area may be for renting. The 1 per cent rule in real estate is used to determine whether the monthly rental income from the property is greater than, or at least equal to, one per cent of the purchase price. Therefore, looking for locations with a good balance between price and higher rental value means that owners can achieve a better return on investment.