PRICE TO RENT RATIOS
You probably calculated your rental’s price-to-rent ratio during the purchase process. But when was the last time you updated it? Checking your area’s price-to-rent ratio on a regular basis may help keep your property profitable in a number of ways.
As things change it may make sense to recalculate some of the most important numbers you use to keep your property competitive. The price-to-rent ratio is one of the most important to have because it is a good indicator of how much – and in what direction – home values have changed over the past year. In a stable market, those changes might be small. But in more volatile or fast-growing markets, property values may have gone up or down significantly in the past year. The only way to know is to regularly update the price-to-rent ratio for your area.
The price-to-rent ratio is the ratio of comparable home prices in the area to annualized rent. The most accurate ratios focus on the area in which your rental property is located, although you can calculate it based on whole cities or even countries. To calculate a ratio specific to your area, you’ll first need to do some research and find some properties comparable to your rental. Look for nearby properties with the same square footage, age, and so on. Then, take these five or so comparable properties, add their listed sales price together, and divide by the number of properties to get the average price.
The second piece you need is annualized rent. Look at several rental properties similar to yours in your area and get their current rental rate. Add the rates together and then divide by the number of properties to get an average monthly rent, and then multiply by twelve months to annualize.
With these two numbers, you can now calculate a price-to-rent ratio for your property. Divide the average home price by the average rental rate to arrive at your ratio. For example, if the average home price for your area is $200,000 and the average rental rate is $10,000 ($1,000 x 12), your price-to-rent ratio would be 20. As a rule, a price-to-rent ratio of about 15 or above indicates a healthy demand, while a ratio of 21 or above usually corresponds with a highly competitive rental market.
With an accurate price-to-rent ratio, you may have better insight into your local market and whether your current rental rate is in line. If your rates are too low, you may be losing money, while if your rates are too high you may have a hard time finding tenants, leading to longer vacancies.
Would you like a full, professional market analysis of your rental property – at no charge?
Contact Ray Martin at The Martin Agency to find out more.