DQYDJ Logo

Price to Rent Ratio Calculator

Written by:
PK

On this page is a price to rent ratio calculator. Enter the price of the home or other asset or building, plus the expected monthly or annual rent, and the tool will compute the price to rent ratio.

Price to Rent Ratio Calculator

What is the Price to Rent ratio?

The price to rent ratio compares the price of an asset, such as a building or house or land, to the amount paid to rent that asset. It's used in a relative way to rank alternatives for a specific size of investment by showing how quickly a sum is paid off by rent alone.

The inverse of the price to rent ratio is the rental yield. It's useful in certain situations to compare to other investment yields, such as interest rates on cash or dividend yields. Price to rent is closely related to the capitalization multiple (and its inverse, cap rate or capitalization rate). The cap measures use NOI or Net Operating Income, which includes other income for a deal, such as coin-operated laundry, vending machines, membership fees, etc.

Alternative Views and Benchmarks on Price to Rent

Although the price to rent ratio is (canonically) an annual measure to compare fairly to other price ratios such as price to earnings, sometimes in real estate investing, monthly rent is the right tool.

The "100x Rule of Real Estate" and its inverse, the "1% Rule of Real Estate" figures that an excellent deal is a purchase price of 100 times the monthly rent. As a rule of thumb, this ratio builds in a fair margin of safety to make a quick return on investment calculation possible.

Price to Cash Flow Ratio Formula

The price to rent ratio formula is

price\ to\ rent\ ratio=\frac{asset\ price}{rent}

Where:

  • Asset price - the total price to purchase some asset, whether real property or virtual.
  • Rent - the annual amount of rent for someone to use the asset.

Limitations on Price to Rent 

Price to rent is limited in quite a few ways, both on the rent and price sides.

As mentioned, capitalization measures which use net operating income are often superior to rental measures. NOI factors in rent, sometimes vacancy, plus all other expected income generated from a property. It nets out expected expenses, such as annual maintenance, taxes, insurance, and other relatively predictable charges.

Both the cap rate and the rental yield (the inverse of price to rent) are financing agnostic, but choice of funding affects the final yield on an investment. For real estate, often lenders will put in 50% to upwards of 100% of a property's cost in some instances, with a cost of debt below rent or NOI. 

The actual cash at risk may be well under the total price for both rental and cap ratios – that is, down payments will be lower than total price most of the time. In these instances, cash on cash return percentage on a property can be much more than a simple ratio conveys. And these ratios won't reveal which properties are eligible for more aggressive funding.

Finally, naive metrics like the capitalization metrics and price to rent don't account for plenty of risks, nor do they account for value. Price to rent ratios generally ignore vacancies, and they also don't factor in major planned expenses and the difficulty of collecting rent. Some properties also have major risks of damage, whether through vandalism, organized crime, or natural causes.

While multiples can give you a sense of relative value, only when you dig in to do a full underwriting will you recognize all of (or even many of) the risks.

      

PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

Don't Quit Your Day Job...

DQYDJ may be compensated by our partners if you make purchases through links. See our disclosures page. As an Amazon Associate we earn from qualifying purchases.
Sign Up For Emails
© 2009-2022 dqydj.com
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram