Hi guys,
A new post I just put out to all our clients. Might be of interest to some of the newbies on here:
There have certainly been some volatile markets over the past few decades. From the loan and savings crisis in the 80?s & 90?s, the tech boom and bust, to the recent rise and fall of real estate, there is a lot to be learned and people who got on the right side of these markets made an absolute fortune. Guess what? We are at the bottom of the next big opportunity. You probably already know that and that is why you are reading this.
Let’s look at these swings from a simplistic point of view. The “herd mentality” starts buying, we all get excited about an asset class, and prices naturally rise as everyone is a buyer. It is clear that earnings are often overlooked as we all jump into the latest and greatest investments. Warren Buffet has become a very rich man by ignoring the “hype” and determining real value and worrying about his short term cash flow returns.
An excellent ratio to aide an astute investor in determining the “value” in a real estate investment is to look at the price-to-rent ratio. The price to rent ratio simply compares the purchase price to rent. For example, if a property owner is asking $100,000 and the monthly rent is $1,000 the rent ratio would be 8.33.
The average rent ratio for 2009 was about 20
The average rentio for 2012 is about 13
Cities such as Atlanta, Kansas City & Indianapolis being attractive with investors for favorable average PRICE-TO-RENT ratios of 6.5-7.8.
Most turnkey providers should be able to achieve better than this for you, at around the 4-5 ratio mark.
Trulia’s quarterly sales data is a little skewed due to most home sales being foreclosure purchases, so to be achieving 3.8-4.0 price rent ratio’s for clients on a complete TURN-KEY property would be considered good value!
The below link shows the rent ratio’s for most 1st & 2nd tier cities in the U.S; Obviously, the lower the ratio, the better the opportunity to create favorable returns.
Can't say I have ever heard of 'Price-to-Rent Ratio' before, but I do not see how it is any different to yield? Where the rent divided by the home value is expressed as a percentage. Essentially the inverse of what the price to rent ratio tells you.
Yields tend to increase, (or price to rent ratios tend to decrease) the lower the value of the property is. I am a firm believer that the yield of a property should typically be around 8% (this would give you a ratio of 12.5).
Anything higher than this, the renters are paying too much and anything lower, the value of the house is too high.
I guess with the return in the US, the value of the house dropped so dramatically, but the price of renting the properties remained relatively the same, giving such high yields and low ratios.
Hi Streamline,
I think it is more an American term, as all the large data/research firms seem to quote this ratio to track housing markets domestically rather than yield.
The trulia rent-vs-buy quarterly presentation is worth keeping an eye on
I would say Cap. rate is a much better guide than yield, as it is based on net income rather than gross.
rllilycrop
No kidding I have never figured out the OZ facination with gross rental returns.. Gross works well if you have a rapidly accending market like you have had in OZ the last decade… but in flat to slowly moving markets like the US its all about cap rate and NET yield… Gross yield is just a number with no bearing on what you have to come out of pocket with when your gross yeilds equel Net loss's or to use your venacular Negative Gear or positive Gear.
Add in some spruikers selling you a lemon and its even worse
Nobody talks about cap rates on these forums that i have seen.
That's just ridiculous, I don't get it…we don't even advertise the gross yields on our publications, what's the point? It's all about cap rates, isn't it?
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
I agree, Gross numbers don't mean anything.
But Gross numbers are good from a macro level when deciding to choose a specific market.
I don't find it that surprising that Detroit scored the highest price-to-rent ratio (highest gross rent) but also scored the highest vacancy rate ratio.
As Streamlined has said, in the right market, 8% is a solid score, but for the newbie's on this sight, it is quite easy to find that 8% return in the US anywhere, but the tougher decision to make is choosing a market with employment growth, population trends, low vacancies & finance opportunities
Property management variations from state to state doesn't have huge a impact on the net return, nor does the annual insurance
Hopefully some people who are interested in seeing the US market from a visual macro perspective would appreciate the unbiased trulia link.
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