What is the price-to-rent ratio?
The price-to-rent ratio compares a property's purchase price with the annual rent of a comparable home. It is a screening multiple, not a complete rent-versus-buy analysis.
The formula
Price-to-rent ratio = Property price / Annual rent
The result is a multiple, not a percentage. A lower ratio means a lower purchase price relative to annual rent; a higher ratio means the opposite.
How to use it
- Enter the property price.
- Enter the annual rent for a comparable property.
For example, a $400,000 property against $24,000 of annual rent gives a ratio of 16.7.
How to interpret it
Use the ratio to compare similarly located and configured homes, not as a buy-or-rent verdict. It does not include mortgage terms, opportunity cost, taxes, insurance, maintenance, transaction costs, expected rent or price changes, or holding period. Model those inputs before deciding.