The Rental Index is the percentage of the purchase price that can be recovered in the monthly rent. For example, a house that is purchased for $150,000 and rents for $1500 would have a rental index of 1.0. If the same house could rent for $3000, that would be a rental index of 2.0, since 3,000 is 2% of $150,000.
You can calculate the Rental Index by dividing the monthly rent by the purchase price,, and then multiplying by 100.
For example: Purchase price $200,000
Monthly Rent: $1800
1800 / 200,000 = 0.009
0.009 X 100 = 0.9
This example would have a Rental Index of .9.
Most investor's agree that a property should have a Rental Index of at least 1.0. However, a lower Rental Index may be acceptable if vacancy is unlikely, or if you know you are going to hold on to the property long enough for the appreciation to make up the difference. A Rental Index higher than 1.0 is going to give you better cash flow.