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Price To Sales Ratio Formula:
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The Price to Sales (P/S) Ratio in real estate is a valuation metric that compares a property's price to its annual rental income. It helps investors evaluate how many years it would take to recoup the property price through rental income alone.
The calculator uses the P/S ratio formula:
Where:
Explanation: A lower P/S ratio typically indicates a better investment opportunity, as it suggests the property price is low relative to its income potential.
Details: The P/S ratio is crucial for real estate investors to quickly compare different investment opportunities, assess property valuation, and make informed investment decisions based on income potential.
Tips: Enter the property price and annual rental income in the same currency units. Both values must be positive numbers for accurate calculation.
Q1: What is a good P/S ratio in real estate?
A: Generally, a P/S ratio below 15 is considered good, but this varies by market and property type. Lower ratios typically indicate better value.
Q2: How does P/S ratio differ from capitalization rate?
A: While P/S ratio measures price relative to gross income, cap rate measures net operating income relative to price. P/S is simpler but less comprehensive.
Q3: Should I include vacancies in annual rental income?
A: For accurate calculations, use realistic annual income that accounts for typical vacancy rates in your market.
Q4: Does P/S ratio consider operating expenses?
A: No, P/S ratio uses gross rental income without deducting expenses. For a more complete picture, consider cap rate or cash-on-cash return.
Q5: How often should I recalculate P/S ratio?
A: Recalculate when rental rates change significantly or when considering property improvements that could increase income.