{"id":129614,"date":"2020-09-25T15:00:14","date_gmt":"2020-09-25T21:00:14","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=129614"},"modified":"2021-03-16T17:03:07","modified_gmt":"2021-03-16T23:03:07","slug":"rent-to-income-ratio","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/rent-to-income-ratio","title":{"rendered":"What Investors Should Know About Rent to Income Ratio (+5 Great RTI Markets)"},"content":{"rendered":"

To celebrate the launch of BPInsights<\/a>, we’re sharing a portion of this Pro Member-only article with all our readers… for free! For more detailed information about calculating and using rent-to-income ratio\u2014and other vital real estate metrics\u2014as well as expert insight into trends, market changes, and real estate news, join BiggerPockets Pro for full access to BPInsights’ articles<\/a> and Property Insights<\/a> feature.<\/em><\/p><\/blockquote>\n

When analyzing potential investment markets and neighborhoods, pay careful attention to the rent-to-income ratio (RTI). While this calculation isn\u2019t as popular or well known as the rent-to-price ratio or return metrics like return on investment and compound annual growth rate, I find it a good rule of thumb to measure a market\u2019s health. It’s a quick way to assess housing costs on a large scale: Can tenants afford their rent payment? Do rents have room to grow?<\/p>\n

Here\u2019s a deeper look into the rent-to-income ratio\u2014and why every real estate investor should know when and how to use it.<\/p>\n

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Successful investing requires accurate, easy-to-understand information about your properties and the markets you invest in. BPInsights gives you the information you need to find your next great deal and maximize your current investments\u2014from expert analysis to proprietary data sets.\u00a0Start leveling up your investments today<\/a>.<\/em><\/p>\n

What Is Rent-to-Income Ratio?<\/h2>\n

The RTI measures a very simple\u2014but very important\u2014concept for landlords: How much of your tenant\u2019s gross income goes towards their monthly rent? This can be a crucial calculation for estimating your renters\u2019 financial stability and ensuring your rental property reaps its maximum cash flow.<\/p>\n

For decades, personal finance experts have recommended that tenants spend no more than 30 percent of their income on rent. This rough guideline means that a tenant making $30,000 per year can afford $750 per month in rent ($30,000 * 0.3 \/ 12<\/em>) and still, in theory, afford other key expenses and savings.<\/p>\n

If rent has grown for years and the RTI is still around or under 30 percent, the rent growth is likely sustainable. In fact, there might even be more room to grow. If rents are growing rapidly and the RTI has shot up to 35 or 40 percent\u2014or even higher\u2014that could spell trouble. Tenants may be at high risk of not making rent. Alternatively, it could indicate that rent climbed too high, too fast and may fall in the future.<\/p>\n

Related: <\/strong>How to Estimate Future CapEx Expenses on a Rental Property<\/a><\/em><\/p>\n

Rent to income ratio and investors<\/h3>\n

For investors, calculating a market\u2019s overall RTI can identify locations with solid investment potential. Here\u2019s why:<\/p>\n