[quote=SandraL]So, in theory….a $200,000 purchase price in an area where average rent is $1200 monthly results in ratio of 166?
What would you define the ranges of ratios
1) Fantasyland ____ to _____
2) Ideal _____ to _____
3) Profitable but less than ideal ___ to ___
4) Breaking even ____ to ____
5) Hello foreclosure ____ to _____[/quote]
Yes, your math is correct. As another poster pointed out, sub 100 is when you get into very profitable investment territory (especially now with rates as low as they are). Rates do throw off this calculation some, as a lower rate means an investor can realize cash flow at a higher price than with a higher interest rate.
I think the historical average for San Diego is somewhere around 150-160.
My breakdown would be (using current rates)
1) Fantasy investors dream – < 80
2) Ideal (cash flow investment) - 80-120
3) Break even investment - 120-140
4) Rent neutral - 140-180
5) Overpriced - 180-220
6) WTF Bubble territory 220+
The difference between break even and rent neutral is the difference between an investor and a homeowner. A homeowner would be rent neutral at a higher price than the investor, since the homeowner has to pay rent every month. An investor has to allow a certain percentage of "downtime" for the unit, and cannot count on rent every month on a unit.
