What is a Rent to Value Ratio?
Hello, everyone. Caleb with Dansie Design Build here. Today, I wanted to talk to you about the rent-to-value ratio such as why the rent-to-value ratio is important and how it’s a great tool to use while you’re evaluating different opportunities that you have with investing in real estate.
Rent to Value Calculator for Rental Property
The rent-to-value ratio is essentially the monthly rent income divided by the total cost of the property. If we have a $2,000 a month rental, and it costed $400,000, we would do $2,000 divided by $400,000, and that’s a half a percent on the ratio, which is what it is.
What Rent to Value Ratio Real Estate Investors Look For
Before the interest rates started coming down, and the equities in these homes started to increase over the last 18 months or so, a lot of real estate investors were looking for 1% on that ratio. That would be a property that costed $100,000 and rents for $1,000. Now, those are pretty much nonexistent, especially in the market that we’re in. These markets that are booming, like the Salt Lake area, Boise, Idaho, California; these different places, 1% is really not likely to be found.
How We Calculate the Rent to Value Ratio for Basement Finishing
What we can do, when we’re calculating things for a basement finish, when you’re looking to make it into an apartment, that pencil’s out very well, because for example, a basement finish, with an apartment that has a staircase and everything, could cost, pretty easily, a $100,000. That would be a good budget to start with, as a rule thumb. Then you divide that by the monthly rent that you’re going to get. Let’s say that maybe this basement apartment’s going to rent for $1,500 divided by the $100,000 that it costed to do those improvements is a 1.5% ratio. So that’s really good. We find the same sort of ratios with the accessory dwelling units and basement apartments.
Why Are Basement Apartments or Accessory Dwelling Units a Better Investment?
The reason why is because we don’t have to pay for the land, it’s already been paid for. The cost of investment is cheaper, we don’t have to invest in the land because it’s already there. So that’s why basements and accessory dwelling units can really be an awesome opportunity for a lot of people to invest in their home and get cash flows coming in every month.
How Long Does it Take to Pay Off a Basement Apartment in Salt Lake County?
A lot of people are able to pay off these basements in about five years with the rent that they’re receiving. After that, it’s paid for. So, compare that to a traditional investment where you’re going to either get a 15 or a 30-year loan, that you have to pay off and then start getting the cash flows. So, for a lot of people, it really works out very well.
How You Can Evaluate the Rent to Value Ratio for a Basement Apartment or ADU in Salt Lake County
I hope this helped you better understand a little bit about the rent-to-value ratio and how you can use it to evaluate the cost of putting in a basement apartment, building an ADU, or investing in other real estate in the area. We have a lot of resources on our website about basement finishing costs and a basement finishing cost calculator that gives a rough estimate for your basement there. You can also schedule a consultation. Thank you and have a great day.