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 helpful when measuring a market\u2019s health.<\/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
The RTI measures a very simple\u2014but very important\u2014concept for landlords: How much of your tenant\u2019s income goes towards their rent? This can be a crucial calculation for estimating your renters\u2019 financial stability.<\/p>\n
RTI tells us two things:<\/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 (<\/span>$30,000 * 0.3 \/ 12<\/em>) and still, in theory, afford other key expenses and savings.<\/span><\/p>\n I don\u2019t want to be the type of landlord who squeezes tenants for more money than they can afford. Thus, any market or property with an RTI over 30 percent indicates to me that the tenant may be in an unsustainable financial situation. That\u2019s not good for the tenant or the landlord.<\/p>\n For this reason, I typically look for markets and neighborhoods with a sub-30 percent RTI. But remember: 30 percent is just a guideline. You must examine the market holistically\u2014the RTI is just one of several key data points.<\/p>\n A lot of the data we examine for BPInsights shows rent trends\u2014which markets are seeing rents go up, and which aren\u2019t. That data is super helpful, but past performance doesn\u2019t guarantee future results. Just because rent has increased in the past does not mean it will continue to do so. That is why I use RTI to look at price sustainability.<\/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 climbed too high too fast and may fall in the future.<\/p>\n The great thing about RTI? It\u2019s extremely easy to calculate. You need only two metrics: median annual income and median rent. You can gather these metrics for an entire state, city, or neighborhood. No matter how granular your data is, the formula remains the same:<\/p>\n RTI = median rent \/ median income<\/em><\/p>\n Let\u2019s look at San Antonio. The city\u2019s median income hovers around $49,000 per year, and the median rent price is about $1,200 per month, or $14,400 per year.<\/p>\n Just divide $14,400 by $49,000, and you\u2019ll see that San Antonio\u2019s RTI is 29.3 percent.<\/p>\n That\u2019s it! That is all the math you need to calculate RTI for any state, city, village, or neighborhood. If that wasn\u2019t easy enough, BiggerPockets Pro and Premium members can <\/strong>download a spreadsheet for most of the country\u2019s top 500 markets here<\/strong><\/a>. (Password: insights)<\/p>\n Just like with every real estate rule, there are exceptions to my above guidelines. With RTI, the most notable exception is for high earners.<\/p>\nAre rents sustainable?<\/h3>\n
How to calculate RTI<\/h2>\n
Exceptions to the 30 percent rule<\/h2>\n