I don’t think the “quality” of the cashflow is the main issue. True, you’re theoretically dealing with a better quality renter, but that actually may not be the case. The biggest issue is how much the cashflow is expected to grow over time. Rents in affluent, high growth areas are expected to grow more rapidly over time than less affluent, lower growth areas. Show me a high growth, less affluent area and I’ll show you higher price-to-rent multiples than low growth, more affluent areas. It’s like discounting the dividends of a stock. If V=CF/(D-G) where , V=Value, CF=Cashflow (rent less expenses), D=Discount Rate, and G=Growth, D may be a little lower for the higher quality properties (less risk), all else being equal, but the real differential in the denominator will be determined by G (growth). The higher the expected growth, the higher the value and thus the price-to-rent ratio.
