In 2010, rental prices increased by 11.6%, moving the national average from $1181 to $1319 per month.
This increase is a direct reflection of the rise in foreclosure averages nationwide forcing families into rented single family homes or apartments. And, foreclosures are not declining as we move into 2012, creating further pressure on the upward movement of rental rates.
As a real estate investor, or someone who is looking to invest into real estate with a Self Directed IRA or 401(k), identifying areas of the country with the best Price-to-Rent ratio is critical. This Rent vs Buy Index is used across the board when identifying strong investment markets.
The impact of foreclosure numbers, unemployment and low job growth generally have an effect on the ratio number, creating a great market place for real estate investors.
What is Price-to-Rent Ratio?
Price-to-Rent ratio is a mathematical calculation that compares total homeownership costs with the total cost of renting a similar property. This ratio is used for home buyers to make a decision on where would be a good market to purchase their home.
Costs taken into consideration are; Mortgage principal and interest, Property taxes, Insurance, Closing costs, HOA dues and Mortgage Insurance where necessary.
Total costs of renting are then also taken into consideration, including renter’s insurance, maintenance, property management company etc.
How is Price-to-Rent Ratio calculated:
Ratio Thresholds:
1 to 15 Price-to-Rent Ratio: Much better to buy than to rent
16 to 20 Price-to-Rent Ratio: Typically better to rent than to buy
21 or more Price-to-Rent Ratio: Much better to rent than to buy
Ratio Thresholds for Real Estate Investors:
1-10 Price-to-Rent Ratio: These are generally the best markets to purchase investment properties. These markets have generally been hit by high foreclosure rates, high unemployment and low economic growth.
A list of these markets can be seen on this great interactive map by Trulia here.
Cost and cash flow are key when deciding on an investment. Below is an example of an excellent cash-on-cash return of an actual property held by one of our Self Directed IRA clients in Florida:
Investment strategy: Hold for rental income
| Purchased single family property | $35,000 |
| Closing costs were | $2000 |
| Rehab was a total of | $5,000 |
| Total investment is | $42,000 |
| Current market value is | $60,000 |
| Average rent in area for this size house | $925 |
| Insurance & taxes | $150 |
| Property management fee per mo. | $95 |
| Monthly Net | $680 |
| Annual Net | $8,160 |
| Cash on Cash return | 19% |
| Instant appreciation due to rehab | $18,000 |
If you are a retirement investor who wants to own rental properties you can move some, or all, of your 401k funds into a Self Directed IRA or 401(k) for investment into income-producing real estate.
For more information visit www.IRA123.com or call 877-229-9763.
References:
1. Hotpads calculation
2. Trulia thresholds
