What is Price-to-Rent Ratio?
How can it help?
Price-to-Rent ratio should not be the only thing you use when determining where to invest, however it can help you narrow down markets that you have in mind.
Typically the lower the ratio the cheaper it is to buy and more expensive to rent, and the higher the ratio the more expensive it is to buy while the cheaper it is to rent. This is not always the case, as every market has different values, but this is a good generalization of how to use it.
For example, Detroit has a Price-to-Rent ratio of 4.4, which is very low. This might be enticing for an investor because you can purchase cheap properties that will cash flow well, however you will not be creating much wealth because properties do not appreciate very well. Where somewhere like Los Angeles, with a Price-to-Rent ratio of 27.9 makes it more affordable to rent, but over the past 22 years Los Angeles has seen appreciation of 277% compared to 29% in Detroit.