Real Estate Technology · San Francisco, CA · Member since 2016 · 262 posts · 265 votes
There is a common metric pro investors use to choose markets that many newbies overlook ... the gap between the estimated average mortgage payment and market rent
Rent vs. Own Gap = Avg. Estimate Mortgage Payment - 2 Bedroom Market Rent
When the gap between mortgage payments and rents widen, you'll see better qualified, longer term renters. Properties in these markets typically have lower turnover and a lower expense ratio.
When the gap between mortgage payments and rents contract (or turns negative), you'll see lower qualified tenants, a greater number of evictions, and higher expense ratios.
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1. Do you use this metric, and if so, what is your rule of thumb?
Specialist · Fairfield, CT · Member since 2019 · 36 posts · 51 votes
7y
I've used it to double-check value-add programs. In other words, if I feel like I'm being ambitious with my renovated-unit rent assumptions, I'll do some digging on home prices in the local market and determine the average monthly payment--including taxes, insurance, and utilities.
I've never come up with a hard formula for the practice. If the numbers are too close for comfort, it makes me dig deeper. It's something to consider alongside the market's growth rate and the amount of new supply in development. Since all of the data should mix together to form your final analysis, it's a valuable metric that helps one understand the market.