For many people moving to a new location, one of the big questions is whether you should rent a property or buy a home.
There are many factors which will influence your decision, such as your financial situation and how long you plan to stay. However, there is one more extremely important factor which you should consider when deciding whether to rent or buy a home: the price to rent ratio.
What is the “Price to Rent Ratio?”
The price to rent ratio is a simple real estate metric with a fancy name which says if it makes more financial sense to rent or to buy in a specific housing market. The price to rent ratio measures the affordability of buying a home versus renting one.
Unlike many other real estate metrics, this one is very easy and straightforward to calculate: You simply need to divide the average property price in your selected housing market by the average annual rent – the monthly rent multiplied by 12.
Here is an example of how to calculate price to rent ratio in Los Angeles, according to data from Mashvisor, an advanced real estate analytics tool:
- Average Property Price in Los Angeles: $916,700
- Average Monthly Rent: $3,110
Price to Rent Ratio = $916,700/($3,110 x 12) = 25
So, the price to rent ratio in Los Angeles is 25.
What does the Price to Rent Ratio tell you?
You’ve done the math and determined your price to rent ratio. But what does it really mean? This is how to use this number when you decide whether to rent a property or buy a home in any particular real estate market.
- 15 or below: It is more reasonable to buy a home than rent a property.
- Between 16 and 20: It is probably better to rent than buy, but could be a toss-up.
- 21 and above: You should be renting.
The markets where you should definitely rent rather than buy in 2018
In order to help you decide whether to rent or buy, we’ve used data from Mashvisor to put together a list of the housing markets with the highest price to rent ratios this year. This means that you should definitely rent in these cities as property prices are simply too expensive compared to rents to justify buying a home.
Highest Price to Rent Ratio Housing Markets in the U.S.
|City||Price to Rent Ratio||Average Property Price||Average Monthly Rent|
|3||New York, NY||34||$1,144,500||$2,780|
|5||Palm Springs, CA||32||$660,900||$1,700|
|7||San Jose, CA||29||$1,054,800||$2,990|
|8||San Francisco, CA||29||$1,623,000||$4,690|
|15||San Diego, CA||26||$821,900||$2,670|
|16||Los Angeles, CA||25||$916,700||$3,110|
|18||Fort Lauderdale, FL||24||$667,300||$2,300|
|19||New Orleans, LA||24||$416,800||$1,440|
|22||Salt Lake City, UT||24||$416,000||$1,460|
|25||Las Vegas, NV||23||$356,000||$1,290|
Source: Mashvisor, May-June 2018
Some of the cities on this list are notorious for expensive real estate, such as San Francisco, Napa and San Jose. Others, like Pittsburg, Las Vegas and Asheville are more affordable in terms of property prices, but the rental rates are so low that it still makes more financial sense to rent rather than buy.
If you’re looking to relocate to one of the 25 markets on this list, you can be confident in your decision to rent in these cities rather than buying a home – at least over the next few months or even years.
Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.
Photo by Daryan Shamkhali on Unsplash
The rent information included in this article is for illustrative purposes only. The data contained herein do not constitute financial advice or a pricing guarantee for any property.