Definition of Price to Rent Ratio
The price to rent ratio is a simple calculation that measures the relative affordability of a property in a given housing market.
It’s calculated by dividing the home price by the annual rental rate.
Why is this term important?
For example, the price to rent ratio for condos in Greater Vancouver is 25.03. This is based on the average condo price divided by the annual average rental rate, or $540,912 ÷ ($1,692 x 12) = 25.03.
But what does 25.03 mean?
The price to rent ratio is a quick method of determining whether or not to rent or buy a specific property or within a particular geographic region.
For seasoned real estate investors, it’s also a helpful tool that can be used to compare the relative costs of buying and renting across different markets.
As a general rule of thumb, it’s better to buy when ratios are below 15.49. For purchases that require more analysis look for ratios between 15.50 and 21.49. Buyers should steer clear of any neighbourhood or property with a price to rent ratio above 21.50.
Potential landlords still need to make sure the neighbourhood or property with a ratio below 21.50 will support rental rates that will cover all costs and still earn a profit. Even if the price to rent ratio falls in the green zone, if the numbers don’t match, walk away.
Examples of term
Let’s assume the average condo price in a particular city is $540,912 and the average monthly rental rate is $1,692. The price to rent ratio would be calculated as: $540,912 ÷ ($1,692 x 12) = 25.03.
This price to rent ratio shows that it’s better to rent a condo than to buy it.