“Given the Price-to-Rent ratios in U.S. vs Lagos, it makes more sense to buy residential properties in the US as opposed to Lagos. The average ratio in the US is 18 indicating that a landlord gets the renter to pay off the property in 18 years, while in Lagos the average ratio for houses is 30 and apartments is 40. This indicates that an average renter in Lagos would take almost 40 years to pay off the value of the home in annual rent.”
Since the mortgage financing program in a place like Nigeria is at its infancy, most Nigerian residents rent as opposed to own their homes. The high demand for rent enables Nigerians in the diaspora to use the dollar earning power to purchase residential rental property back home as an additional income stream.
Source: Nigeria Property Centre
We delved into this activity more closely and came across a popular metric used by real estate investors called Price-to-Rent ratio. Price-to-Rent ratio illustrates what percentage of the property’s value is the tenant paying in annual rent.
The price to rent ratio is determined by dividing the average home price by the average annual rent:
- Home Value: $200,000
- Monthly Rent: $1,100
- Annual Rent: $1,100*12 = $13,200
- Price-to-Rent ratio: $200,000/$13,200 = 15.15
A price ratio of 15.15 indicates that if a renter were paying an annual rent of $13,200, it will take the renter ~15 years to pay off the value of the house. This means that the larger the ratio the better it is for the renter, the lower the ratio the more favorable the rental price is for the landlord.
According to smartasset.com, the U.S. national price-to-rent ratio as of April 2020 is 18.09. That means the average American renter pays rent for 18 years to pay the value of the house he/she is renting. Now this doesn’t take into account other factors such as property appreciation. In the US, large cities tend to have high price to rent ratios, indicating that in large cities, it makes more sense to rent than to own.
Given the Price-to-Rent ratio, we performed some analysis using the Nigeria Property Centre tool to identify if it makes sense to buy rental property back in Nigeria as opposed to using that money to buy property here in the US. We focused our data as of October 2020 in Lagos, Nigeria because of the significant growth in property development and the large amount of foreign investments from African diasporans into the city. Here are a few takeaways from our analysis:
Key Takeaways
- Given the ratios in US vs Lagos, it makes more sense to buy and rent out properties in the US as opposed to Lagos. The average ratio in the US is 18 indicating that a landlord gets the renter to payoff the property in 18 years, while in Lagos the average ratio for houses is 30 and apartments is 40. This indicates that an average renter in Lagos would take almost 40 years to pay off the value of the home in annual rent.
- In Lagos, it makes more sense to invest and charge rent in upscale areas because they have a lower price-to-rent ratio. That indicates that the Nigerian renter will pay a significant portion of the house value in a upscale neighborhood.
- If you decide to invest in residential property in Lagos, overall, it makes more sense to invest in houses as opposed to apartments. The average price-to-rent ratio is 40 (apartment) vs 30 (house). This indicates that on average it will take 10 years longer to get a return on your investment on an apartment.
- There are exceptions to the rule, for landlords, apartments in Eko Atlantic and Ikoyi provide a better rental return than houses. This is most likely due to the prestigious nature and high cost of living in these two areas.
- If you would like to be a landlord, below are the Top 5 residential properties to own (price-rent ratio):
-Eko Atlantic Apartment: 8.3
-Ikoyi Apartment: 19.3
-Lekki House: 20.0
-Ibeju Lekki House: 20.7
-Surule House: 21.0
- Do not buy residential property in lower income areas, because the rent paid by the tenant is too low relative to the value of the property (ratios in the 40s)
Below is the illustration of our analysis. These values are in Naira local currency (380 Naira = $1)
