Rent-to-Value (RV) Ratio

[John Thi]

Does anybody know the correct way to calculate this ratio? I have seen two ways on the internet.

House Value $200K and monthly Rent is $900 - This is an example

1. Monthly rent 900/ 200,000 = 0.005

Ideal valuation measure for investment property is 0.7% or more while 0.5% is acceptable and below 0.5% is unacceptable (monthly gross rental income divided by the current fair market value of the property should ideally be 0.7% or higher)

2. Annual gross rent 10,800 / 200,000 = .054 What is the Ideal valuation measure for this calculation?

[Helen Kolton]

Hi,

I think you are looking for Cap Rate Formula.

You take your net expenses and divide them by purchase price.  Going back to your example:  House Value $200K and monthly Rent is $900

 900x12=10,800

10,800x.30 (approximate expanses) = 3,240 (could be higher, depending on your insurance, taxes, etc.)

10,800 - 3,240 = 7,560.00

7,560 divide by your purchase price 200,000 = 4% cap rate

anything below 7% is not a good investment.

I hope this will help.

here in New Jersey typically investors look for 10% or higher.