DEFINITION of 'Price-to-Rent Ratio'
A mathematical calculation utilized in the Trulia Rent Vs. Buy Index that compares the totals costs of homeownership with the total cost of renting a similar property. The total costs of homeownership considered by the ratio include:
- Mortgage principal and interest
- Property taxes
- Closing costs
- HOA dues where appropriate
- Mortgage insurance where appropriate
Tax advantages for owning (such as the mortgage interest deduction) and the total costs of renting, including the actual rent and renter's insurance, are also considered in the total cost of renting.
INVESTOPEDIA EXPLAINS 'Price-to-Rent Ratio'
The price-to-rent ratio provides a comparison between owning and renting properties in certain cities. The ratio uses the average list price with average yearly rent on two-bedroom apartments, condos and townhomes that are listed on www.trulia.com, a real estate search website. The price-to-rent ratio is calculated by dividing the average list price by the average yearly rent price, as follows:
Price-to-rent ratio = Average list price / (Average Rent * 12)
Trulia establishes thresholds for the ratios as follows:
- Price-to-rent ratio of 1 to 15 = much better to buy than rent
- Price-to-rent ratio of 16 to 20 = typically better the rent than buy
- Price-to-rent ratio of 21 or more = much better to rent than buy
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