Monthly Archives: January 2017

Real Estate Investment Hacks using Price-to-Rent Ratios

I’ve been wanting to get into real estate investments for quite a while after pushing in heavy on stock  investments.  There is something that seems more gratifying about owning a piece of property.  So what are the best places to invest in real estate?  There are many ways to go about answering this question but most of those boil down to figuring out where you could service the cheapest mortgage for the highest yield (rent).  The best proxy for this, by city, is Price-to-Rent ratios.

Historic Price-to-Rent index values

The price-to-rent index is a nominal index which represents the trending cost of buying vs. renting a property.

I’ve been curious about figuring out where I could buy an investment property and charge enough rent to cover my mortgage/HOA/expenses and then some.  I know that I could get some data from Zillow on home prices, rent prices and price-to-rent ratios for cities across the country.  I figured I’d start there to find the best locations for investment rather than take someone’s word for it.

Zillow Research

I grabbed my data from the  Zillow Research page.  It contains a bunch of csv with all of the housing data that you could possibly want.  Thanks Zillow!

I downloaded the Price-to-Rent ratio csv by city,

City_PriceToRentRatio_AllHomes.csv

The median price of a 3-bedroom by city csv,

City_Zhvi_3bedroom.csv’

and the median rental price 3-bedroom csv.

City_MedianRentalPrice_3Bedroom.csv

I figured that this would be good enough to start.

Which cities have the lowest Price-to-Rent ratios?

There are many parts of the country that have super low price-to-rent ratios.  Though, they all have their catches and quirks.  Some of them are only good for vacation rentals and others are in high-risk areas in the inner cities.  There are other things to take into account like environmental risk.

Price-to-rent ratios

  • Price-to-Rent Ratio

I found the lowest price-to-rent ratios to be somewhat interesting.  You can see that there are poorer areas where the ratios are really low.  Detroit, for example, has just about the lowest price-to-rent ratios in the country.  That’s mostly due to a mass exodus from the area.  You could buy a place here for dirt cheap and rent it out for much more than the mortgage but you’re taking a significant risk.  First of all, the place probably is filled with used tires/trash and getting it into good condition to rent out would require further investment.  There is a chance that someone could squat in the property.  Also, there is inner city Memphis where crime is the highest according to Trulia.  I’d rather not.

On the other end of the spectrum in price-to-rent ratios you have a place like the Hamptons.  Bridgehampton, NY is sought after by many people and it’s very expensive to buy a place there.  Most of them are over two million dollars.   While the cost to buy is high, the rent is even higher.  It’s not uncommon to see places in the Hamptons rent for $60,000 a month.

Okay, so we have a super expensive place to invest and a place that is potentially dangerous and high risk, as far as investment is concerned.

What about Lauderhill, FL?  I looked at this area (I’m originally from this part of FL) and most of the people here are retired.  Perhaps, there are a group of people who don’t wish to own in that area and would rather rent.   I’m not sure that I would feel comfortable rising the rent on the elderly.  I’ll pass.

Where to look now?

We looked at the city of Memphis and found that there was high crime in the area.  What about other surrounding  areas of Memphis?

I’ve found some more low price-to-rent ratios.  Why don’t we compare the cost of renting vs buying there.

  • Waterford, MS     5.82
  • Horn Lake, MS    7.30
  • Memphis, TN      7.49
  • Lamar, MS            7.59
  • Red Banks, MS   7.90
  • Byhalia, MS         7.91
  • Southaven, MS  8.10

House in SouthHaven, MS

Let’s say that you bought this place for $202,000.  Your mortgage payment would be $771 a month with tax and insurance it would probably be more around $1000 a month.  How much could you rent this property out for?

Wow, $1650 is pretty high rent considering that the price to buy is relatively cheap.  Theoretically, you would make $650 dollars on top of what you pay for the mortgage, taxes and insurance.  Take into account things like maintenance/repairs and management costs, this still seems like a decent investment especially if you expect the prices of homes to go up in the area (more analysis on that later).

Property in Waterville, NH

This property is located near the Waterville Valley Ski Resort.  It’s a fair price for the area and properties in Waterville have a very low price-to-rent ratio at 1.87.  This is the lowest price to rent ratios in the country according to the data at Zillow Research.  It’s possible to rent out a property like this for $350 dollars a day or $10k dollars a month.

Potentially $10k a month yield

You should be aware of the fact that this rental property would most likely only go for $10k a month during prime-time ski seasons.  If it’s not a good year for snow then you would have lots of vacancies.  Actually, you could expect to lose 10% of yields due to vacancies. In general, most real estate professionals will tell you to expect to lose 5% for vacancies in a regular market.  There are some advantages to making all of your yields during the 4 or 5 months a year.  You won’t need to rent it out all that often and that would bring lower maintenance costs.  Also, it’s free for you to visit during the times it’s available.  Having a vacation property would be nice.

Exciting opportunities throughout the country!

There are definitely some great opportunities to purchase some high yield assets.  Property appreciation rates are going up as well.  For instance, Portland has currently a 14.7% home asset appreciation rate.  This is most likely because people are sick of paying high rents in San Francisco and have decided to take their down payments somewhere else.  Why not get more for your money in an appreciating market? Tech is getting bigger there as well.  I’m happy to hear your thoughts on real estate opportunities in this country and abroad.  Do you happen to have any real estate or wealth building hacks?