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The Lowest Price to Rent Ratio Markets in the US at the End of 2018

Are you at a crossroad in life deciding whether you should buy a home or keep renting? Are you wondering what objective factors to use in order to make the most financially sound decision? Ponder no more, the answer is here.

The most critical factor when you choose between buying a home and renting a property in a particular market – other than your personal financial situation and preferences – is the price to rent ratio.

This brings us to an important question:

What Is the Price to Rent Ratio?

Unless you have been in the housing and rental market for a while, you might not be familiar with the price to rent ratio. No worries, we’ll explain it to you in a simple, straightforward manner and even show you an example.

Basically, the price to rent ratio is a real estate metric which tells homebuyers, renters, and real estate investors (i.e., landlords) whether property prices or rental rates are relatively higher in a certain location. The price to rent ratio is easy to calculate: you just have to divide the average property price in your local housing market by the average annual rent.

As promised above, let’s take a look at an example:

According to data from Mashvisor, an advanced online real estate data analytics tool, currently the average property price in Phoenix, AZ is $427,700, and the average monthly rental rate is $1,440. What’s the price to rent ratio in the Phoenix real estate market?

Price to Rent Ratio Formula:

Price to Rent Ratio = Average Property Price/Average Annual Rent

Price to Rent Ratio = $427,700/($1,440 x 12)

Price to Rent Ratio = 25

So the price to rent ratio in Phoenix in October 2018 is 25. However, again, unless you are a real estate expert, this number does not tell you much.

How to Use the Price to Rent Ratio as a Renter/Homebuyer?

The price to rent ratio is usually divided into 3 categories or ranges:

Low price to rent ratio, i.e., 15 or below: Price to rent ratio of 15 or below is considered low. For renters and homebuyers, this means that it is relatively cheaper to buy a property in a certain market rather than to rent there. So, if you have the necessary cash for a down payment and have figured out the rest of your financing in such a market, go ahead and buy a home.

Moderate price to rent ratio, i.e., between 16 and 20: If you live in a location where the price to rent ratio is between 16 and 20, it most probably is wiser – financially speaking – to rent a property rather than to buy a home. This is what most real estate professionals recommend anyway.

High price to rent ratio, i.e., 21 or above: High price to rent ratio markets are those where this number equals or exceeds 21. In such a place, it makes most financial sense to rent and not to buy as properties are just too expensive compared to the rental rates.

So, going back to our Phoenix example, if you currently live in the capital of Arizona, you should rent a property rather than buy a home as homes are expensive.

Which Markets Should You Buy in?

Probably you are already wondering where and how to look in order to find the figures that you need to calculate the price to rent ratio in your market and decide whether you should buy or rent. To make life easier for you, we provide you below with the real estate markets across the US with the lowest price to rent ratios in October 2018. The calculations are based on data from Mashvisor.

Source: Mashvisor, October 2018

So if you happen to live in any of these 49 locations across the US, you know that you are better off buying your own home instead of renting.

What Makes a Market Have a Low Price to Rent Ratio?

As you can see from the list above, there aren’t many commonalities among the lowest price to rent ratio markets in the US. In terms of geography, they are distributed all over the nation though a few are located in the states of New York, New Jersey, Texas, Michigan, Ohio, and Connecticut. Nonetheless, it cannot be concluded that these states have low ratios as some of the highest price to rent ratio markets are also located within them, for example Branford, CT (33) and New York, NY (29). In addition, they range in size, population, demographics, and economic development.

One thing that’s common among these locations though is the relatively low property prices. In most of these locations, the median property price does not exceed $250,000, which is below the level in many other top markets at the moment. The low property prices are thus the main driver of the low price to rent ratios in these 49 locations. The only exception is Santa Rosa, CA with a median property price of above $650,000.

With regards to rents, they are quite affordable. So even if you live in one of these markets and don’t have the money to buy a home, no worries. The rental rates are actually below what you would face in many high price to rent ratio places.

What Else to Consider When Deciding to Rent vs. to Buy?

Of course, the price to rent ratio in your local housing market is an important factor when you decide how to settle your living situation, but it is not the only thing to take into consideration. You should also look at other indicators such as:

Your financial situation: Even if market analysis says it makes more financial sense to buy a home rather than to rent one in your location, you still have to have the money to do that. On the one hand, you must have enough money in the bank to make a down payment and cover all costs and expenses associated with buying a home. On the other hand, you should also have a stable and reliable job in order to qualify for a mortgage and to know that you will be able to make the monthly mortgage payments as well as all other expenses such as property taxes, property insurance, etc. So, before you decide to buy a home, analyze your financial situation and budget well.

Your plan for the near future: Before you decide to commit to buying a house, you have to know if you will remain in your current location in the next few years and decades or you will be moving soon. Of course, there is no way to know for sure but think carefully about your situation, your job, your family, your preferences, and all the other factors which will affect your decision to stay or to move. If chances are that you will be moving to a new city or state in a year or two, it is better to rent now and buy a home in your new location.

Your family situation: Are you single or married? Do you have children? How big is your family? The answers to these questions will guide your decision to rent vs. to buy too. If you are single but plan to marry soon, maybe it doesn’t make sense to buy a small apartment that you can afford now and then switch to a big house in a few years. Meanwhile, if you already have children, it’s probably better to buy a home to provide them with a sense of security and stability.

Your preferences: Finally, there is another more subjective criterion, and this is your preferences and priorities. For some people, it is crucially important to buy a home in order to feel accomplished and successful. Others would rather change their location every few years and travel the world in between. So, you have to take your personality and your priorities in consideration in this decision.

Conclusion

Other than your personal situation, the price to rent ratio is the most important factor which you should investigate when deciding whether to buy a home or rent a place to live in. A low price to rent ratio market means that it is financially more sound to buy rather than to rent. This means that in these 49 locations with the lowest price to rent ratios in the US at the moment you should be researching the housing market and exploring the options to buy a house or an apartment for yourself and your family. Meanwhile, if you’re interested in knowing the highest price to rent ratio markets in 2018, read The Markets with the Highest Price to Rent Ratio in the US Right Now.

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.

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