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It’s the yield, dude — Greater Fool - The Troubled Future of Real Estate
P/E P/R yield
Fortunately, it exists, at least in rough form: The P/R ratio.
This is the Price-to-Rent ratio, which has been used for some time to figure out if a piece of real estate is fairly valued relative to its ability to earn income in the marketplace. It operates on the same principle as a stock’s P/E ratio (no, that does not mean how much you wet your shorts when opening your latest mutual fund statement).
With stocks, investors can judge if the price being asked is worth paying based on what a single share yields. If the price is expensive and the earnings low, then the P/E is high – not a good thing for short-term capital gains.
With a house, same thing. If the asking price or current market valuation bears an unrealistic relationship to what it can be rented for, well, it’s probably not worth what the vendor is asking. Here’s how to determine that:
Simply take the annual rental income and divide it into the property’s price tag, and then measure it against an historic norm. One good benchmark, according to Moody’s Economy.com, is a P/R of 16 – which is a long-term average.
Erica Douglass - When Should You Buy Real Estate — And When Is It Better to Rent?
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