Definition
Price-to-rent ratio compares purchase price to annual rent. Higher ratios suggest buying is expensive relative to renting. Lower ratios suggest better buy value. It helps evaluate buy-versus-rent decisions.
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Price-to-rent ratio reveals the relationship between purchase prices and rental income. A ratio of 20 means it would take 20 years of rent to equal the purchase price. Higher ratios suggest properties are expensive relative to rental income (better to rent), while lower ratios suggest properties are relatively affordable (better to buy). Price-to-rent ratio helps investors and homebuyers decide between purchasing and renting. Ratios vary by market and property type.
Pro Tip
Use price-to-rent ratio for buy-versus-rent analysis. Lower ratios favor buying; higher ratios might favor renting.
Example
A property priced at $400,000 rents for $2,000 monthly ($24,000 annual) has a price-to-rent ratio of 16.7, compared to neighborhood average of 18, suggesting good buy value.