Key Investment Tools: Price to Rent Ratio

14th October, 2015
  • In real estate, the price to rent ratio is a tool to determine how the total cost of home ownership compares to the annual rent for homes in an area. The average list price typically is used to determine whether it is preferable to buy or to rent in an area.

    Usually, if the price to rent is 15 or less, then it is much better to buy than it is to rent. If the price to rent is between 16 and 20, it is typically more favourable to rent, and if it is over 20 then generally it will be significantly better to rent than to buy.

    The price to rent ratio can help predict how market prices might change and what properties will ultimately prove a strong investment. The main force behind this is in areas where the price to rent ratio is different than the average; it gradually tends to move in a way that will realign it with the average.

    This means that if the price to rent ratio is higher than the overall average, property prices will either decline or at least not increase while prices in areas around it rise, and is thus considered to be a weaker investment.

    However, if the price to rent ratio is at a value that is lower than the average, then the chances are good that property values will increase over time, making it a strong investment.

    Calculating the Price to Rent Ratio

    Calculating the price to rent ratio follows a very simple formula – you take the real estate price and divide it by the annual rent.

    Real Estate Price/Annual Rent = Price to Rent Ratio

    So, if a home costs $500,000, and the annual rent was $50,000, it would have a price to rent ratio of 10. This home would be better to buy than to rent, and a sound investment opportunity as well.


    by: Prime Asset Investments

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