In this video Jason Hartman introduces the rent‑to‑value (RV) ratio as a simple, rule‑of‑thumb metric for quickly assessing the performance of a rental property. He explains why many common figures like cash‑flow claims or cap rates can be misleading without context, and he sets a target of roughly 1% monthly rent‑to‑value for prudent, linear markets. Hartman walks through a concrete example of a Jacksonville, FL property priced at $158,000 with $1,400 monthly rent, showing how a near‑1% RV ratio translates into an estimated 30% annualized return when accounting for appreciation, tax benefits, principal paydown, vacancy, repairs, and management fees. He critiques cap rates, preferring cash‑on‑cash and overall ROI, and stresses buying quality A/B properties rather than high‑yield junk C/D assets. He also warns against market‑timing speculation, citing his experience buying during the Great Recession and noting that while some deals achieved RV ratios as high as 1.8%, those are rare and often unrealistic. The overarching message is to use the RV ratio to ensure a property makes sense at purchase, avoid gambling, and adopt a conservative buy‑and‑hold strategy.
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Hey, it's Jason Hartman, and today I want to talk to you about rent to value ratio. This is an extremely simple concept, the RV ratio. But you know, sometimes the simplest things in life are the most accurate and the best because we get mired in complexity, don't we? We get lost in the sea of complexity. And, and a lot of times what complexity does is it either hides a scam or it causes us to fool ourselves into all these rationalizations. Lots of rationalization. So the RV ratio, the rent to value ratio is a very simple. Well, it's a rule of thumb, yes, a rule of thumb that will help us just determine very simply the performance of a property. Now you can go and you can talk to your friends, you might be at a, at a cocktail party or something, and you're talking to your friends and they're bragging about this property they bought or this property they own, what a great deal it is, what a great deal this property is. Because they'll say things like, well, you know, I have $700 a month positive cash flow on this little single family home that I own. But what you don't know is you don't know what their loan balance is. You don't know what the value of the property is. You don't know how much equity they have. You also don't know what type of financing they have. Maybe they have an adjustable rate loan with a very low, imprudent teaser interest rate that is going to adjust later and turn that seemingly good deal into a very bad deal, right? So one very quick, simple way that you can evaluate a property is, and you can sort out a lot of the junk, you can get rid of it, you just throw it away. Of course there's more to it than this. There's a lot more to it than this. But it's a quick rule of thumb that is the rent to value ratio. Now, our target rent to value ratio in this market, now this does change. The target has to change a little bit. Not too much, but a little bit based on market conditions. Now, the market we're currently in here in 2019 is a market where we have very low inventory in the prudent linear markets, the markets that make sense from a cash flow perspective. With good rent to value ratios, we have very limited inventory in those markets and we see increasing inventory in the imprudent, overvalued cyclical markets. Cyclical markets meaning the west coast of the United States, the expensive northeast South Florida linear markets being almost everything else except the hybrid markets in between. I'VE got another video on this on the YouTube channel and lots of information about it on my podcast. But suffice it to say that we still have very limited inventory in the good linear markets. So the rent to value ratio I want you to target in those markets is somewhere in the neighborhood of 1% per month. 1% per month. So. So that means if the property is $150,000, ideally you could realize a rental income 11 months of the year because you've got to allow for one month of vacancy 11 months of the year. That is close to $1,500 per month. If it's $100,000 property, $1,000 per month, that would be a really good rent to value ratio. Now, in this market, you tend to not get that quite as often. Okay, you don't get it as often here. If you can get a 8 or 9 rent to value or RV ratio on a good quality A or B class property, not a junky C class or D class property, those properties will always, on paper, have higher rent to value ratios. But in practice, they usually don't work out that way. In terms of the Performa, right, There's the Performa and then there's reality. And often these are two completely different things. Now, if you go to jasonartman.com this is what our performas look like. Okay, now here is a property in Jacksonville, Florida. This is a good, solid linear market, and it is. Let's examine this one. It is $158,000. I'm going to round off a little bit for expediency, but 158,000 and the projected rent here is $1,400 per month. That's not bad. That's not bad at all. Okay, not quite 1%. If it was 1%, it would be $1,580 per month. But hey, 1,400 on a 158 property in this market is pretty darn good. You can see this property@jason hartman.com in the properties section. And overall, again, I have another video that is 27 minutes long which will teach you how to evaluate a real estate investment. And that takes you through this entire pro forma, every single number on this Performa. How do you like our highly sophisticated visual aids? Yeah, I know, of course I'm poking fun at myself here. But on the website, you can see lots of Performas just like this. And you can see lots of details about the properties. But with that rent to value ratio in the neighborhood of 1%, this overall return on investment of this property is projected to perform at 30% annually. Remember income property, a multi dimensional asset class. So when you take into account all the dimensions of the property, the appreciation, the tax benefits, the principal reduction on the mortgage that your tenant pays for you, all of these different great benefits, including one month vacancy per year, repairs, management fees, all of this stuff. Overall, 30% annualized return on investment. That's the projection from a close to 1% RV or rent to value ratio. And couple other metrics here. Cap rate or capitalization rate of 6.7%. That's the projection of. I don't like cap rate very much. You've heard me talk about this probably on other videos or the podcast. Why not? Because it just doesn't give us enough information. Okay. Cap rate excludes some very important things. It excludes appreciation rate. It also excludes financing or leverage, and on commercial real estate, the financing or leverage and usually the appreciation actually is not as good as it is on the residential properties. So cap rate is not my favorite metric. I would prefer cash on cash return. Cash on cash return is better. But overall return on investment is really the best metric of all. And again, our philosophy is a buy and hold conservative philosophy. Prudent, good rental markets and shoot for that close to 1% rent to value ratio. Now I will tell you, and you know, thousands and thousands of deals were done by my company during and immediately after the Great Recession. The worst economy in seven decades that we've actually lived through. Right? And they were buying properties back in 2010, 2011, 2012. And rent to value ratios. We saw them on decent properties. Now listen, on junky properties, you'll always get really high rent to value ratios. But again, they don't tend to come true in real life. Okay? So if you want them to come true in real life, buy the better quality properties. That's what we say. And we've been saying that over thousands and thousands of transactions, over many many years of doing this. So on decent quality properties, we saw rent to value ratios as high as. I know I don't want to bum you out here, but I'm gonna bum you out a little bit. 1.8. Yeah. That means a hundred thousand dollar property that would actually rent for $1,800 a month. I know, I wish I would have purchased every deal and not sold any to my clients because I would be way better off today if I had done that. But when you're in a down market, you know, you just don't know how far down it's going to go. This is why market timing just doesn't work. It doesn't work. It doesn't work. Give it up. No market timing. The best thing to do is just buy good quality properties that make sense the day you buy them. My commandment number five in my ten Commandments is thou shalt not gamble. In other words, the property must make sense the day you buy it or you don't buy it. No speculation, no gambling on appreciation in the future, right? So how do you know it makes sense? The rent to value ratio is a very good metric. Try to get as close to 1% as you can in this market. Hey, during the next Great Recession and it will inevitably come. We will have deals that will perform even better, but very few people will have the confidence to buy them in those dark times. They will inevitably come. We don't know when, but they always do. Everything has a cycle to it. It's the Austrian School of Economics and the business cycle and it's always there. So until the next video Rent to Value Ratio. Very quick rule of thumb to sort out a lot of the complexity in a real estate deal rent to value ratio try to get in the neighborhood of 1% per month. Go to jasonartman.com for more. Listen to the podcast for a lot more depth on all these topics and happy investing until we meet again on the next video. Thanks for listening. Sam.
