I can explain the rent multiplier of 160 in one word, “incorrect.”
Depending on the formula, 144 or 150 is the highest rent multipler you should use. 144 is 12x annual rent which many use as a high number for California, 10x for the rest of the country and 8x for low tooth count states. 160x rent is probably from a lender sponsored website rent vs buy calculator. 125 to 150 is the desired range.
If I’m an investor and I can buy a place that rents for 1,000 and sells for 150k (150 x rent) or a place that rents for 2,000 and sells for 320k (160 x rent) I’m better off buying two of the cheaper ones. As an investor I don’t care that the weather is nicer or the schools are nicer, it’s just numbers, like P/E or dividends for a stock. When investors flee, it drives prices down, when they show up, prices rise. They start showing up at or below 150x. Investors don’t care, they will buy stock in a porn company with good numbers over a bible publisher with bad numbers.
Here’s the rub, as the market rises beyond logic, investors ignore the rule and buy at ratios higher than 150x because of the hype. As the market falls and the hype goes the other way, they ignore the rule again and still don’t show up at 150x or lower, this is called an overcorrection which is the opposite of a bubble. You see prices at lower than last year and think it is a bargain, you buy before everyone else does only to find out they aren’t going to show up for years, so even at 150x you have caught a falling knife. People are idiots, even people with money are idiots. They will buy something overpriced to fundamentals because they watch t.v. and they will ignore a fundamentally sound investment because of that same t.v., your job is to predict the cycle of idiots and stay ahead of them. Max price on 1800 rent unit, 270k, when it falls below that, buy it, especially if it falls much below, lets say 125x rent or 225k. BTW I used your high rent number, at 1600 (especially if the 1800 rent places are giving away 1 month free, etc.) your number should be in the range of 200k and 240k. Think it won’t happen, well I didn’t think the stock of the largest U.S. lenders and builders could fall to 30 cents on the dollar in one year either. Wall street is always ahead of main street by a year.
