Price to rent ratio for multi’s?

Question

Hi everyone!

I have a question regarding the price to rent ratio metric. I have read in a few of the BP books that price to rent is a pretty important measurement for analyzing different markets.

I am having a hard time finding the data, as well as had a question regarding multi’s.

Do you find a different avg rent price & avg prop price based on the amount of units in the property to gauge more accurately? How do you like to find the data?

Thank you so much for the help,

Kyle

Jeff Copeland · Answer

I think perhaps you are reading too much into this metric.

The idea is if you know nothing else about a property, you should at least be able to figure out: 1) the price, and 2) the gross rents.

(These two numbers should be fairly easy to find - these should probably be the first two questions you ask as a potential buyer)

From there, the math is simple: Are the rents at least 1% of the purchase price? If so, the property might be worth further analysis. If not (especially if they are well below 1%), it probably isn't going to cash flow very well.

That's it. It's a quick screening tool for doing a 30-second analysis of a deal. Sort of a litmus test.

Here's an example:

Property A - Listed for $250,000. Total gross rents are $3,000/mo

Property B - Listed for $275,000. Total gross rents are $2,000/mo

Which one looks like a more exciting deal?

Assuming the two properties are in the same class and neighborhood, I'm going to spend my time analyzing Property A first.

There are lots of other factors to consider (for example Property A could be falling apart, and Property B could be turnkey) - The price to rent rations (aka 1% rule) is just a quick screening tool, nothing more.

This may help to further clarify: https://www.biggerpockets.com/...

Kyle Curtin · Answer

@Jeff Copeland

Hi Jeff,

Ooooh that makes a lot of sense. It makes more sense to just use the 1% Rule, I think I was looking waaay too far into it haha! Thank you so much for the advice it’s very much appreciated!

Thank you,

Kyle