A price-to-rent ratio is a crude tool – I say crude because it only considers two variables – for helping homebuyers determine if it is cheaper to rent or buy a home in a particular city/neighborhood/subdivision. The formula looks like this:

Median Home Sales Price / (Median Rent * 12) = Price-to-rent ratio

Let’s say the median sales price for a home in a target subdivision is $500,000, and the median monthly rent is $2000/mth. You would calculate:

$500000 / (2000 * 12) = 500000 / 24000 = 20.8

Great! What does 20.8 mean? Here are the ratio guidelines:

Price-to-rent ratio of less than 15: It’s cheaper and more affordable to buy versus rent.
Price-to-rent ratio of 16-20: Leans towards renting as a better option over buying.
Price-to-rent ratio of over 21: It’s more affordable to rent.

In the screencast below, I work out ratios for 10 Valley suburbs: Can you guess which one is North of 21?

 

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