Rent to Price Ratio (ie. P/E Ratio) in the Bay Area


By BayArea   Follow   Mon, 24 Oct 2011, 2:22pm   3,307 views   23 comments
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Hi folks,

I'm new to the site and excited to have found a real estate/investing forum that has some ties to the Bay Area as I have struggled with this in the past (Thank you Patrick for putting it together).

Back in early '10, I came across a link to this site that showed the rent to price ratio by zip code in the Bay Area.

Patrick, I'm wondering if you do keep this data current and if so, is there any way for this site's members to access the information? It would be interesting to see how those ratios are changing with time.

Also, it may be confidential, but if you are willing to share, I'm wondering what sources you use to accumulate the data and how reliable it is in your opinion.

When it comes to investment properties (rentals), one of the big objectives in a down market, is to minimize the amount of time it takes to make your initial investment back and that is where Patrick's research is quite helpful.

For the Bay Area folks, does anyone have any recommendations for locations/zip codes for the purchase of the most desirable rental properties under $200K currently?

Lastly, I remember reading recently that for investment properties, it is difficult to get more than 60% LTV? Is that true or does the 80% still typically apply if all other ducks are in line? (in other words, 20% down)

Thank you!
BayArea

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  1. Patrick


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    1   2:35pm Mon 24 Oct 2011   Share   Quote   Permalink   Like   Dislike (1)   Protected  

    Sure, I've got all that data, here:

    http://patrick.net/realestate.php

    It gives the est annual rent / price for every property on Craigslist. That ratio is part of the for-pay part of Patrick.net though ($7/week) since I was trying to make a living from that.

    I used to also collect Zillow, Redfin, Movoto, and Trulia price data, but stopped when I realized it was a legal hazard.

    For rents though, Craigslist seems to have well over half of all listings nationally! That's huge. So the rent data is the valuable part. And rent data is generally more truthful than sales data. When a landlord lists a place for a certain rent, he generally means that price. No bullshit like the realtors pull.

    The best areas for investing are typically the worst areas to live in. Poor people can't get loans anymore and don't have cash by definition, so they're generally forced to rent. But that's a good thing for a lot of them. They got screwed by debt in the bubble.

    Rich people just blow WAY past any justification for paying as much as they do. It's all about status for them, and being a renter even in a high-end area just doesn't give them the same status as being an owner of the exact same thing. They could rent for half as much as their monthly loss from owning. But they don't.

  2. BayArea


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    2   2:55pm Mon 24 Oct 2011   Share   Quote   Permalink   Like   Dislike (2)  

    Patrick,

    Thank you for the link and I will look into it further when I have a free moment.

    When I first looked at your data from March '10, I noticed exactly what you are describing. There was a very strong correlation between the annual rent:price ratio and the median home price (inverse relationship). As the annual rent:price ratio went up, the median home price went down.

    I also agree that the "asking" rental price is typically spot on. However, you do have a denominator there which is the annual price of the home. For this figure you have to assume some selling price along with an interest rate?

    The interest rate doesn't matter so much because it is constant throughout all your analysis, however, the price of the home does matter. Do you use something like zillow to estimate that?

    Thanks Patrick! I look forward to learning from and contributing to the site.

  3. Patrick


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    3   4:28pm Mon 24 Oct 2011   Share   Quote   Permalink   Like   Dislike (1)   Protected  

    BayArea says

    However, you do have a denominator there which is the annual price of the home. For this figure you have to assume some selling price along with an interest rate?

    I don't bother estimating the asking price for a house that's just for rent. They're not selling it.

    Instead, I go the other way, and try to estimate the rent for a house that is actually for sale. On the one hand, it's hard to estimate rent because property varies so much. But on the other hand, I have so much data now (several million points) that the nearby rents give you a good idea of the market:

    http://patrick.net/housing/rental_comps.php

  4. SiO2


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    4   8:06am Wed 26 Oct 2011   Share   Quote   Permalink   Like   Dislike (1)  

    Patrick, you said
    "being a renter even in a high-end area just doesn't give them the same status as being an owner of the exact same thing."

    I think that there's status associated with living in a particular place, but it's independent of buying or renting.

    Normally, in a social setting, people don't announce that they buy or rent. If I meet someone at a party, they may say "I live in Menlo Park" or whatever, but normally the buy/rent doesn't come up. I don't know for a fact if my neighbors buy or rent; I suspect that they own, because I see them making improvements to the house, but perhaps a landlord is paying them to do so. I'm sure there are exceptions bu this has been my experience. So a renter can get the status of the Fortress for a cheaper month to month price.

    In my case, the reason I bought instead of rent
    1. I really really hate moving. And it actually costs me money, the time I spend on a move is time spent not working which will hurt me.
    2. I would like to improve the house or property in certain ways.
    3. In the long run (10 years plus) I believe that it will be cheaper to own then rent. If the SJ economy becomes Detroit then this was a bad bet, but I don't think this will happen.

    Of course, points 1 and 2 will vary by person. Some people like the variety of moving frequently. And some don't mind a nice 70s avocado green formica kitchen. Renting will be more attractive for those folks.

    Another reason why the p/e is less favorable in the high end: The MID is worth more for people in a higher tax bracket. Also, interest is less for those with better credit scores, and I suspect that credit score correlates with income.

  5. Michael D


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    5   5:31pm Wed 26 Oct 2011   Share   Quote   Permalink   Like (1)   Dislike (2)  

    I definitely think there is a status associated with buying in a neighborhood vs. renting. There is an announcement and usually a congratulations received on the accomplishment when somebody buys (signs for a loan), I don't that happens when somebody rents. I think it is because in the past buying meant you had saved up enough for a down payment, plus met strict lending requirements etc, so it was a significant accomplishment to announce. Now it could just mean that you got an FHA loan with 3.5% down, or in the bubble you could have financed it all or done an interest only, etc. A lot of the meaning behind the accomplishment was taken out during bubble, but the perception of the accomplishment still remains.

  6. B.A.C.A.H.


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    6   12:39pm Thu 27 Oct 2011   Share   Quote   Permalink   Like (3)   Dislike (3)  

    Michael D says

    I definitely think there is a status associated with buying in a neighborhood vs. renting

    Ah yes, another Hipster for whom status trumps value.

  7. BayArea


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    7   1:08pm Fri 28 Oct 2011   Share   Quote   Permalink   Like   Dislike (3)  

    Perception between buying and renting is not at all what this thread was meant to be about, but it can certainly be an interesting conversational piece, lol.

    As Patrick points out, the poor typically don't have downpayment money and worse credit and have no choice but to rent. Poorer areas also typically have a higher foreclosure rate which, at least in the short term, decreases rental supply. All this contirbutes to a higher rent to price ratio in the low to lower middle class regions.

    I am currently in the market for an investment property and am looking into Bay Area cities that are short of affluent (to say the least)... $100-125/sq-ft.

    The question I am asking myself is how dangerous is too dangeous, how high does crime have to be before it's too high, and how difficult will it be to deal with renters who have a lot less to lose than myself? Yes, I'm not being PC here by any means, but with money on the table, I'm trying to look at this from all angles.

    Focus shifting to risk mitigation...

    On the topic of rent to price ratios, jumping on zillow I just took a few examples in the East Bay:

    Price per Sq-Ft:
    Pittsburg - $110
    Concord - $195
    Hayward - $193
    Oakland Hills - $400

    Monthly Rent per Sq-Ft:
    Pittsburg - $1.10
    Concord - $1.31
    Hayward - $1.22
    Oakland Hills - $1.83

    (data courtesy of zillow.com)

    You can see that from an investment stand-point, Pittsburg is the way to go. Of course it is all a moot point if I get shot, lol.

    So what does this mean? Well, if we take Pittsburg as a reference and compare it to Concord for instance... Even though Concord is 77% more expensive to buy a house in, you can rent your Concord house for only 19% more than Pitts/BP!

    What if we compare Pittsburg to Oakland Hills? Even though Oakland Hills is 264% more expensive to buy a house in, you can rent your Oakland Hills house for only 66% more...

  8. corntrollio


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    8   1:00pm Mon 31 Oct 2011   Share   Quote   Permalink   Like   Dislike (2)  

    SiO2 says

    Of course, points 1 and 2 will vary by person. Some people like the variety of moving frequently. And some don't mind a nice 70s avocado green formica kitchen. Renting will be more attractive for those folks.

    This is a ridiculous strawman. I've lived in rentals that were far nicer than many open houses I've been to lately. I think most people's experience with renting is a shitty apartment in college in a college student-majority area. Many of those apartments suck. I also have friends who have rented a place for 10 years (non-rent controlled, even) and friends who have bought 4 places in 8-9 years (they made at least some money during the boom time on the first 3 and lost big on the last one, and probably paid a ton to realtors while doing so).

    But you can also rent a perfectly nice house from a good experienced landlord too who realizes there is value in having a well-maintained house and also in having a tenant who pays like clockwork and doesn't destroy the place. College student housing is a completely different category from this type of rental.

    You can spot the cheapskate landlords from a mile away. I had one try to sell me on his backyard, which would charitably be described as an empty dirt patch. "Nice yard for your dog" - hah! No, my dog likes peeing on grass. :) He also tried to convince me that his price was fair based on Craiglist even though at the time I went to other rentals in the same neighborhood within a block or two that were a few hundred cheaper (and were nicer).

    Michael D says

    There is an announcement and usually a congratulations received on the accomplishment when somebody buys (signs for a loan)

    Who congratulates you? The bank? They probably even send a nice letter telling you about your accomplishment...

  9. FunTime


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    9   2:24pm Tue 1 Nov 2011   Share   Quote   Permalink   Like (1)   Dislike  

    Michael D says

    I definitely think there is a status associated with buying in a neighborhood vs. renting.

    I've had two close friends refer to the single family home I rent as an "apartment." I can only conclude they do this because I rent. One of them owns a house in San Francisco that is a typical SF flat purchased as a TIC. It's small with a shared yard and neighbors on every wall/floor. My home is almost as detached as they come in San Francisco. The other friend owns a home in Marin and has a family history of real estate business. Both bought their homes with help from their parents, which, unfortunately, is not possible for me. Very interesting social dynamic.

  10. corntrollio


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    10   5:56pm Tue 1 Nov 2011   Share   Quote   Permalink   Like (1)   Dislike (1)  

    FunTime says

    One of them owns a house in San Francisco that is a typical SF flat purchased as a TIC.

    Your friend is a real chump. A TIC is as close to an apartment as you can get while still claiming an indicia of ownership. It is not home ownership and never will be. It is not even condo ownership and never will be. There's a reason everyone is trying to become a condo in the condo lottery.

    FunTime says

    Both bought their homes with help from their parents, which, unfortunately, is not possible for me.

    Very common, but funny how people have pride over things that they never earned.

  11. BayArea


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    11   2:59pm Mon 2 Jan 2012   Share   Quote   Permalink   Like (1)   Dislike  

    BayArea says

    For the Bay Area folks, does anyone have any recommendations for locations/zip codes for the purchase of the most desirable rental properties under $200K currently?

    I'm wondering if anyone has any thoughts on this question?

    Within the Bay Area, Vallejo and Pittsburg seem to rank very high on the ROI list. The big question marks are how long would it take to rent a SFH out and what kind of tenants would they be?

    Also, we have tools to identify what rental prices are in a given zip code or location... Patrick makes this info available to us. However, do we have any tools to identify how easy is it to rent a property out in any particular location? That's the biggest factor holding me back from pulling the trigger on a 2nd property. I have a pretty good idea of what units like the one I am considering are renting out for, but I don't have a good idea of what the rental demand is. Help :)

  12. GUAB


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    12   11:27pm Mon 2 Jan 2012   Share   Quote   Permalink   Like   Dislike (3)  

    It's even "worse" (or better) here in Phoenix.

    Houses going for $30k that rent for $700 monthly and don't need tons of work. Check zillow out around 85000.

    http://www.zillow.com/homedetails/3115-W-Almeria-Rd-Phoenix-AZ-85009/7512190_zpid/

  13. thomas.wong1986


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    13   12:22am Tue 3 Jan 2012   Share   Quote   Permalink   Like (1)   Dislike (2)  

    corntrollio says

    Your friend is a real chump. A TIC is as close to an apartment as you can get while still claiming an indicia of ownership. It is not home ownership and never will be. It is not even condo ownership and never will be. There's a reason everyone is trying to become a condo in the condo lottery.

    in my opinion, the biggest con job put on homebuyers in cities like SF during the housing bubble.

  14. toothfairy


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    14   10:56am Tue 3 Jan 2012   Share   Quote   Permalink   Like   Dislike (1)  

    I've heard that you need to put 25% down on investment property. Haven't confirmed it yet though.

  15. EBGuy


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    15   12:24pm Tue 3 Jan 2012   Share   Quote   Permalink   Like   Dislike (3)  

    controllio said: A TIC is as close to an apartment as you can get while still claiming an indicia of ownership. It is not home ownership and never will be.
    I'm going to disagree (slightly? radically?!) with you and tw. Let's clarify. Fractionalized TIC loans were the the biggest con job put on homebuyers in cities like SF during the housing bubble. They allowed 'developers' to sell TICs like condos, when, they most certainly are not. That said, TICs are a good way to get a foothold in a high priced real estate markets where MID deductions are significant. That said, there are inherent risks (nothing that a partition sale can't fix), and you should only go in with TIC partners that you know well (and a TIC Agreement in case the going gets rough).

  16. BayArea


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    16   2:06pm Tue 3 Jan 2012   Share   Quote   Permalink   Like (2)   Dislike (1)  

    toothfairy says

    I've heard that you need to put 25% down on investment property. Haven't confirmed it yet though.

    Correct.

    I'm not saying it's right, but some folks purchase their investment property as a "2nd home" and get away with 20% down. Typically you have to write a letter of intent for that 2nd home and it needs to either be larger, closer to work, etc before you will get that loan closed.

    The moment you utter the word "investment" to your lender, immediately your rate goes up some fraction of a point and they require 25% down as risk mitigation to them.

  17. New Renter


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    17   8:24am Mon 22 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    GUAB says

    It's even "worse" (or better) here in Phoenix.

    Houses going for $30k that rent for $700 monthly and don't need tons of work. Check zillow out around 85000.

    http://www.zillow.com/homedetails/3115-W-Almeria-Rd-Phoenix-AZ-85009/7512190_zpid/

    Where's Roberto?

  18. BayArea


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    18   5:33pm Thu 29 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    New Renter says

    GUAB says

    It's even "worse" (or better) here in Phoenix.

    Houses going for $30k that rent for $700 monthly and don't need tons of work. Check zillow out around 85000.

    http://www.zillow.com/homedetails/3115-W-Almeria-Rd-Phoenix-AZ-85009/7512190_zpid/

    Where's Roberto?

    28% rent:buy? lol

    What's that $30K place selling for today?

  19. lattitude


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    19   6:44pm Thu 29 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Hey Patrick,

    I just plugged in my zip code for comparable rents (from post #3) and found that they don't seem accurate at all. I live in Noe Valley (SF) and it says a 1 BR averages a little over $1,500. I can tell you that this isn't even close to accurate. Average 1 BR here is well over $2k (and I've seen many listings for nearly $3k). Obviously, the post is over a year old, but even in 2009 when I started renting here, rents were $2k+. Figured you might want to know. What gives?

  20. Patrick


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    20   7:10pm Thu 29 Nov 2012   Share   Quote   Permalink   Like   Dislike   Protected  

    The rents are all getting old. I stopped collected them when Craigslist started suing anyone who used their data for anything:

    http://bits.blogs.nytimes.com/2012/07/29/when-craigslist-blocks-innovations-disruptions/

  21. BayArea


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    21   9:36am Sat 1 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Patrick says

    The rents are all getting old. I stopped collected them when Craigslist started suing anyone who used their data for anything:

    http://bits.blogs.nytimes.com/2012/07/29/when-craigslist-blocks-innovations-disruptions/

    Patrick, I'm bummed to hear that.

    Can you tell us when you stopped updating? May not be a bad idea to make that note within your city data section.

  22. Patrick


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    22   10:03am Sat 1 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected  

    I stopped collecting Craigslist data in June of this year.

    I hope to find some other source, but not sure what.

  23. BayArea


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    23   2:59pm Tue 4 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    With rents surging, having an updated list may be valuable.

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