The path to homeownership isn’t always a straight line. After all, there are so many factors that could come into play in the rent vs. own debate. Considerations might include how long you plan to stay in a specific home and location, have you saved enough for a down payment, if you are ready for the responsibility that comes with maintaining a house.
However, one of the biggest considerations when thinking about your housing options comes down to the cost of rent vs the cost to own in any town or city. Often referred to as the price to rent ratio, this calculation can be a helpful tool when determining the rent to value ratio in a certain area.
This ratio is a benchmark that can help potential homeowners as they decide whether or not to plunk down their life savings on a home. Here’s exactly what that ratio is and what it looks like in the top five major metro areas in the United States.
What Is the Price to Rent Ratio?
The price-to-rent ratio may sound intimidating, but fear not, it’s easier to break down than you may think. It’s compares cost of rent to mortgage in a ratio format.
Here’s an example for you: Let’s say the average annual rent paid in the city you are considering living in is $3,000 a month and the average property selling price is $1,000,000.
The price to rent ratio would be calculated by taking the $1,000,000 property value and dividing it by 12 months. That equals $8,333.33 a month.
Next, divide that number by the average rent. In this case, that would be $8,333.33 ÷ $3,000. This gives you the price to rent ratio, which in this example is 27.78.
Alternatively, you could divide the median home price by median “yearly” rent, so $1,000,000 / $36,000. This will give you the same price to rent ratio of 27.78.
This rent to price ratio can indicate whether housing may be overpriced in an area. It can also be helpful when estimating whether it is cheaper to buy or rent. Investors who purchase rental properties often look at this ratio before purchasing an investment property to rent out later as well.
The price to rent ratio can sometimes be used as an indicator of an impending housing bubble. Since a substantial increase in this ratio could mean that renting is becoming a more attractive option in that specific housing market.
Understanding what this ratio means and learning how to calculate this ratio for yourself could be useful information as you consider whether to rent or buy.
There are a variety of resources that describe price to rent ratios in different communities that can helpful in determining what areas are best to rent in or to buy across the country. There are even some helpful online calculators that can give you an estimate of the price to rent ratio in specific zip codes.
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Price to Rent Ratio: When to Buy and When to Rent?
So, is the theoretical town with a price to rent ratio of 27.78 a better place to buy or to rent?
A price to rent ratio ranging from 1 to 15 typically indicates that it is better to buy than it is to rent in a given community. A price to rent ratio of 16 to 20 indicates it is typically better to rent than buy, and a ratio of rent to home price of 21 or more indicates it is better to rent than buy.
Since the theoretical town falls into 21+ category, it would be a rent friendly community. Of course, like all things in life, there are a few exceptions to this rule, but these are general guidelines to follow when making the all-important housing decision.
Looking for a few real-life ratios? Here are five popular metropolitan areas in the United States and their price-to-rent ratios to help you make a better informed decision on your next move.
New York, NY
According to SmartAsset’s 2019 analysis , New York City’s price to rent ratio is 36.83 based on the equivalent of a $1,000 rental to its $441,987 purchased home counterpart. And, as described above, that makes the city a renter’s market rather than a buyer’s one.
San Francisco, CA
It’s no secret that San Francisco’s housing market is one of the most competitive in the country . So, perhaps unsurprisingly, its price-to-rent ratio is a whopping 50.11 based on a $1,000 rental that is equivalent to a $601,362 purchased home, according to SmartAsset.
In Boston, SmartAsset found that would-be residents will find a price-to-rent ratio of 29.23 based on that $1,000 rental equivalent to a $350,811 home. While that’s lower than New York and San Francisco, but the price to rent ratio indicates that it may still be a renter’s market.
Compared to SF and NY, Denver may have a more buyer friendly market, with an estimated price to rent ratio of 25.60 based on a $1,000 rental and a $307,232 home. That still puts it above the threshold for those wavering between renting and buying.
One major city to make the list of places where it’s better to buy than rent is Chicago, which scored a 19.99 based on a $1,000 rental and a $239,831 home price.
But not all cities have price to rent ratios as high as these five hot markets. For example, Detroit has one of the lowest price to rent ratios at just 5.35 when comparing a $1,000 rental price and a $64,194 home.
Deciding You’re Ready to Buy
If you decide you’re ready to buy there are ways to make it more financially feasible, no matter your chosen city’s price-to-rent ratio. And that includes looking into mortgage options so you can find the best option. As you embark on your search, consider SoFi.
SoFi Mortgages offer qualifying borrowers competitive rates and no hidden fees. Plus some people can qualify for a loan with as little as a 10% down payment. You can find out if you pre-qualify for a mortgage in just a few minutes. That way, when the right home comes along—at the right price—you’ll be ready.
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