The rent-to-price ratio compares the monthly rent on a property to what it costs to buy, shown as a percentage. Investors use it as a quick screen: the higher the ratio, the more rent you get per dollar of price.
Rent-to-price ratio = monthly rent ÷ purchase price
A $200,000 house that rents for $1,800 a month has a ratio of $1,800 ÷ $200,000 = 0.9%. A $150,000 house that rents for $1,650 comes in at $1,650 ÷ $150,000 = 1.1%. The second house clears the 1% rule, a common benchmark, and the first falls short. To reach 1% at $1,800 of rent, the first house would have to cost $180,000 or less.
Some sources use annual rent instead, which gives a gross yield. For the first house, annual rent is $1,800 × 12 = $21,600, and $21,600 ÷ $200,000 = 10.8%. The annual version is the gross rent multiplier turned upside down. Check which version you are looking at before you compare numbers.
The ratio only looks at gross rent. It ignores property taxes, insurance, repairs, vacancy and your interest rate, so a house can pass and still lose money. If the property needs work, many investors add the rehab cost to the price before they divide. Use the ratio to sort listings, then run a full analysis on the survivors.