Price-to-Rent Ratio

From an economic standpoint the price-to-rent ratio can assist in determining whether or not it makes more sense to buy or rent a place.

The ratio is calculated using the following inputs:

Price of home/annual rent = price-to-rent ratio

Rules of thumb:

Price-to-rent ratio of 1 to 15 would mean it makes more sense to purchase than to rent.
Price-to-rent ratio of 16 to 20 would mean it’s typically better to rent than to buy, but this is the grey area where a lot would depend on the particular market and situation.
Price-to-rent ratio of 21 or higher means it’s much better to rent than to buy

What I like about the ratio is it helps put into perspective whether or not it’s best to buy or rent purely based on the relative values of comparing rent vs the asset price. This avoids making general statements about the market in general or at a national level.

What the ratio doesn’t do though is take into consideration your own personal situation. For example, do you need mobility or how long you plan on staying in one location. It also doesn’t take into consideration your mortgage payments (can you handle it?), interest rate movements and other economic inputs.

Finally, the ratio does not factor into maintenance costs and generally ignores the question of if you rent and it’s less than the general mortgage payments what should you do with the difference.

A simple solution to that is a rent vs buy calculator (google search it-there’s many out there). This will take into consideration mortgage payments, maintenance and investment returns (the spread of mortgage and rent payments are invested) to determine which makes more sense.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s