Analyzing Price-Rent Ratios in Austin over 5 Years

My last post covered the topic of price-rent ratio maps and how they can be used to identify small geographies that have the potential to provide good cash flowing rental properties. Some areas of a metropolitan area will simply provide a better cash flow than others due to various factors.  By narrowing down your search to specific geographies you can better focus your marketing and acquisition efforts.  Lower price-rent ratios, while only one variable that you should consider when looking for cash flow rental properties, often provide a good idea of what areas are better than others.  

Today I'd like to take our analysis of the Austin metropolitan area one step further by getting a better understanding of how price-rent ratios change over time using a series of maps.  You'll recall from my last post that we created a price-rent ratio map using the most recent data from Zillow for the Austin area.  You can see this map in the screenshot below.  Zipcodes colored in a darker blue color have a higher price-rent ratio, while areas colored light blue or light gray have a lower price-rent ratio.  Zipcodes in dark gray unfortunately didn't have information available from Zillow.  In general we're looking for lower price-rent ratios as they tend to provide a better cash flow.  

I've expanded my analysis by creating a series of maps that show how the price-rent ratio has changed over one, three, and five year time periods.  Take a look at these maps below and then we'll discuss what they mean.

The first map depicts the percent change over the last year (2016-2017) in price-rent ratio.

What this maps tell us is that the areas shaded in darker blue have experienced a larger increase in price-rent ratio in the past year.  In general, the zipcodes in East Austin (east of I-35) are showing higher percent increases year over year.  

What I'm looking for is an area that has a low price-rent ratio in the initial map, but a high percent change over time.  For example, if you look at zipcode 78744 in the initial map (southern part of the map) you'll see that it fell in the color range < 10.54 price-rent ratio, but with a price-rent ratio percent change of < 11.23% in the second map.  That combination is what I'm looking for!  An area that has low price-rent ratio, but is experiencing rapid growth from a percent change perspective.  But we also have to remember that this was only a single year, and could well have just been an anomaly so let's go further back in time.

Now take a look at the three year change for the same area.

The same pattern is exhibited at three years, with price-rent ratio percent changes higher on the east side of I-35.  Again, 78744 is on the high end with price-rent ratio percent changes in the < 22.96% category.  Not the highest category, but still highly significant.

Finally, let's take a look at the trend over five years.  Take a look at the map below.  At this point we now have a signficant period of time to analyze.  And again, the same patterns are evident.  Zipcodes on the east side of the Austin metropolitan area have experienced significant percent changes in price-rent ratio.  Going back to our example of zipcode 78744 it's still in the high category with a price-rent percent change of < 27.68% from 2012-2017.

To summarize, by taking a look at how price-rent ratios have changed over time for a particular areas we can now understand not only what conditions are like today, but also how they have changed over time. 

If I were looking for potential properties to purchase as long term rentals I would be looking at zipcodes on the east side of Austin.  Today, the price-rent ratios are low in comparison to the entire market area, indicating that they are good candidates for cash flow.  As a bonus though, these areas have experienced rapid price-rent ratio increases, indicating that the values of those prices are rising.  So, purchasing now should mean good cash flow AND increasing long terms values.  Again, this is just one variable among many that you need to consider, but it's a good start!

If we look at our example of 78744 we find the following:

• Today's Price-Rent Ratio : 10.54
• One Year Percent Change : +9.29%
• Three Year Percent Change : +22.96%
• Five Year Percent Change : +23.62%

Next time we'll look at some additional Zillow datasets that can help you research potential locations for finding great deals!