Where can you get the most bang for your buck as a real estate investor? The price-to-rent ratio can be a useful aid for deciding which markets to investigate further. It represents the ratio of real estate prices to the annual rents that can be earned.
For example, in Brookline the price-to-rent ratio is around 18. That means that on average, for every $100,000 in property value, you can expect to receive approximately $5,556 of rent per year, or $463 per month. (i.e. $100,000 / 18 = $5,556).
In Worcester, however, the price-to-rent ratio is close to 10. So for every $100,000 of property value, you can expect to receive approximately $10,000 in rent per year, or $833 per month.
Even though your operating income will be different in these two towns, your borrowing costs will be about the same. For each $100,000 you borrow (at 3.92% interest rate on a 30-year mortgage), your monthly payment to the bank will be around $473 per month.
When you factor in taxes, insurance, capital improvements, vacancies, and operational expenses, it's hard to make the math work in your favor in Brookline unless you assume that property values and rents will continue to rise significantly each year. But in towns like Worcester, you might feel more comfortable knowing that your current rents can cover your expenses.
The lowest ratio in the state belongs to Springfield, at 7.8, and the highest belongs to Weston at a whopping 26.75. This is based on data collected by Zillow's Real Estate Research division.
If you're interested in investment property, please contact me to discuss. There are many other factors to consider beyond the average price-to-rent ratios. I work throughout the state, and I used to own and operate a four-unit building in Worcester, which I improved and sold for a gain, all while the rents covered operational expenses.
These are the towns with the 20 lowest price-to-rent ratios in Massachusetts in June:
|Town of Athol||8.71|
|Town of Ware||9.22|