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How to Use Price to Rent Ratio

Jerry Norton

Feb 21, 2024

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Making the decision to buy an investment property can be daunting.

You may wonder questions like:

Will it be profitable?

When can I see a return on investment?

Can I find consistent tenants?

The truth is that there are ways to take the guesswork out of it and put your mind at ease.

Did you know that there’s a formula that can tell you what a good price to pay for a property is?

But that’s not all.

The same formula can tell you what a good rental price will be when you're looking for tenants — that way you can attract the right tenants.

It's true: we're talking about the price to rent ratio. 

In this article, we'll break down everything you need to know about price to rent ratio and how you can use it to make more informed and more profitable investment decisions.

Let's get started!

What is Price to Rent Ratio? 

Price to rent ratio compares the average home sales price to the average annual rent in a specific neighborhood or city. 

The price to rent ratio will tell you whether it's cheaper to buy or rent. A lower ratio indicates that it may be more affordable to buy than to rent, while a higher ratio suggests that renting may be the more feasible option.

Keep in mind you don't want the price to rent ratio to be too low or too high — something we'll break down in a bit.

How to Calculate Price to Rent Ratio

Now that we’ve broken down what price to rent ratio is, let’s take a look at how to calculate it. 

Now that we have a solid understanding of what the price to rent ratio is, let's explore how to calculate it.

The formula for price to rent ratio is:

Price to Rent Ratio = Average Property Price/Average Annual Rent

To start, gather the average sales price data for the desired area. This information can typically be obtained from: Propwire's up to date MLS data, local housing reports, or government databases.

Next, obtain the average annual rental cost for the same area. This data can be sourced from rental listings, property management companies, or rental market reports.

Finally, divide the average property price by the average annual rent.

The result is your price to rent ratio.

What a High Price to Rent Ratio Means

A high price to rent ratio — 21 or above — means that the average home price is too expensive for someone to buy a home, making it more realistic to rent 

The same is true for a real estate investor: because of the high home prices, it may be more expensive for you to purchase a property here, which will eat into your profit margins.

High price to rent ratio neighborhoods are generally already established as good neighborhoods in a city.

While it can attract tenants, it may likely result in low profits.

What a Low Price to Rent Ratio Means

On the other hand, a low price to rent ratio — 15 or below— means that home values are low, which makes the ability to acquire these properties is also low.

But, this also means that the area is likely not a sought after neighborhood for renters, making it difficult to attract the right kind of renters.

Keep in mind that an area with a low price to rent neighborhood may be a good opportunity to find a distressed property — such as a foreclosure or vacant property — to invest in.

What’s a Good Price to Rent Ratio?

A good price to rent ratio falls within the areas of 16-20. 

This score means that home prices are high enough to convince people to rent, while it still being an area that can attract good tenants. 

Plus, a neighborhood with a good price to rent ratio is likely an up and coming area that with ROI potential in the future to come.

The Bottom Line: Price to Rent Ratio

The most successful real estate investors don’t rely on their gut or intuition when it comes to purchasing a property. 

Instead, they take the guesswork out of it, using tools like the price to rent ratio. 

Use this guide to walk you through calculating price to rent ratio before you purchase your first or next investment property.

Also, explore our guides to other formulas that can help you make informed and profitable investing decisions, such as Gross Rent Multiplier, Cap Rate and Cash on Cash Return.