Jason Hartman breaks down 400 U.S. real estate markets into three types: linear, cyclical, and hybrid. He explains the rent-to-value ratio, a metric that divides monthly rent by property value, and says you want it around 1% per month to find markets that generate steady returns.
Questions this video answers
About 400 local markets.
Linear markets, cyclical markets, and hybrid markets.
Monthly rent divided by the property's current value (current value, not historical purchase price).
About 1% per month (rent ≈ 1% of current property value per month).
Jason, where do you think we are in the market cycle? In the real estate cycle?
In the real estate market cycle. So, you know, I divide, as you know, in my teachings, the real estate market into three basic types of markets. And this applies all over the planet. It's not just in the US Linear markets, cyclical markets, and hybrid markets. And the linear markets are the boring ones that don't make the news. They sort of chug along and just appreciate slowly. The cyclical markets are the ones you hear about all the time. They're the west coast, they're the Northeast, they're South Florida. Those expensive markets that are in the news constantly because they're reaching incredible highs. And when they crash, they have really ugly lows. So it's the roller coaster ride pattern. And then the hybrid markets like Austin, Texas, where we are sitting now, is more of a hybrid market. It's becoming more cyclical though, I think, because Austin has obviously been a very popular destination for the last, you know, 15, 20 years. It's getting more and more crowded. And so these markets act differently. Okay, so you can't just talk about the national real estate market or the housing market as if it's one single entity. In a country as large and diverse as the United States, There are about 400 local markets divided into those three categories. Applies around the world as well. So the question is, how do you know what type of market you're in? Well, you know, by the rent to value ratio. That's a very reliable indicator of knowing where you are. Right. So if you want to know where you are on a map, you know, you. Nowadays we use gps. It's a great tool. Right. Well, the simple rent to value ratio, or RV ratio for short, can tell you what kind of market you're in. So if you're getting our target RV or rent to value ratio of somewhere in the neighborhood of 1% per month, meaning 1% of the value of that property, the current value, not what you paid for it 20 years ago. Okay. It's the rent to value ratio. If you're getting 1% per month, you are in a good linear market. Okay. A conservative market that just has the sort of chug along type pattern. So.
So the numbers on that would be.
$120,000, house renting for 1,200 bucks. Got it. Or somewhere in that range, you know, give or take a little bit. A cyclical market on the other end of the spectrum, hybrid, of course, is in between the two. Cyclical market is like Los Angeles, California, where I'm from my original hometown. And so growing up in LA, a million dollar house rents for $4,500 a month. That's less than half a percent. And maybe it rents for even less than that. That is a very cyclical market. So to answer your question in a very long way, where are we now in the cyclical markets? Those markets are way past the point of fundamentals. They are overvalued. There's no question. They're into bubble territory. Problem is, how long can you blow a bubble up before it pops? Nobody knows, not even the Federal Reserve that has more information than anybody. Right. Janet Yellen at the Fed should know exactly where we are in the cycle. And if they knew exactly where we were in the cycle, they could manage the money supply and the fiscal policy and the monetary policy. Well, they don't manage fiscal, just monetary to, you know, to control the market and even out the big ups and downs and the recessions. But they don't. Right, because they don't know either. Nobody really knows.
