Price to Rent Ratio Explained: National Report 2019

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 rent to price 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 apartment rent by city.

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 renting price rate is $1,440. What’s the rent to buy 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 May 2019 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. The city with the lowest ratio can be considered a place with the highest rent in US and the lowest priced houses nationwide. 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 low price houses for rent rates. The prices can be below $900 what is considered cheap rent. These locations have the highest priced houses nationwide.

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 May 2019. The calculations are based on data from Mashvisor.

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Source: Mashvisor, May 2019

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 versus 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. Also, check out our list of best cities to raise kids in the US.

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.

Moving from one city to another is a pretty stressful process, and deciding whether to buy your own home or to rent a property in your new location is one of the toughest decisions along the way.

There are many factors which should help you make this decision including:

Your short- to medium-term plan: If you know that you will have to move again within a few months or even a couple of years, most probably it doesn’t make sense to buy a house. However, if you have all the reasons to believe that you will stay in your new city in the long run, you should explore the options for becoming a homeowner.

Your priorities: Different people have different priorities in life. For some people, it is really important to own a home as this makes them feel secure and accomplished. Others just don’t care where they live as long as they have a roof over their head. Which category you belong to will thus be a major factor in your decision to buy vs. to rent.

Your status and family: If you are single or have recently married and don’t have children yet, it is easier to move from one property to another in case your landlord decides against renewing the rental agreement for whatever reason. On the other hand, if you have a couple of children to bring along in such a case, it might make more sense for you to look for a more permanent solution to your housing situation.

Your budget: Regardless of how important it is for you to buy a home, maybe you just can’t afford it. Most banks require a down payment of minimum 20% of the property price in order to give a mortgage, and not everyone has that amount of money. Make sure you can afford buying a home before you decide to do so. Defaulting on your mortgage or other payments is one of the worst things that you can do as a homeowner.

Your housing market: Last but not least, you have to make sure that your decision on buying vs. renting is based on the actual numbers and makes the most financial sense. We live in a world full of big data, and we have to use it in any decision we make, especially such an important one as whether to buy or rent. Real estate markets vary widely across the US, and in some markets, it is better to rent, while in others it is better to own. How can you differentiate between the two? Keep reading to figure out!

The most straightforward as well as a most reliable way to know whether you should buy a home or rent a property in your local market is the price to rent ratio.

What Are the Markets with the Highest Price to Rent Ratios in the US in 2019?

There is no way to know if you should buy or rent in a market unless you consider the price to rent ratio there. If you are moving to a new location any time soon, no need to worry about this important decision. Below we show you the US housing markets with the highest price to rent ratios this year, based on data from Mashvisor.

What does this mean?

It means that if you are about to move to any of these places, you should definitely rent an apartment and not buy your own property.

Let’s have a look at them:

US Cities with the Highest Price to Rent Ratio

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Source: Mashvisor, May 2019

So, these are the 21 US cities with the highest price to rent ratios. If you live in any of them or plan to move to one of them any time soon, keep in mind that it is financially wiser to rent rather than buy a home there.

What Are the Features of the Highest Price to Rent Ratio Markets in 2019?

Let’s have a look at what makes these markets have such high price to rent ratios:

Property Prices

As you can see from the list above, some of these cities are infamous for the high real estate prices there, such as San Francisco, New York, El Paso, and Irvine. You have to spend over a million (or even a million and a half) dollars in order to buy an average property there, and that’s not the kind of money most of us can afford for housing. In such expensive markets, it makes sense that renting is the better option or even the only affordable one.

However, in other markets such as Memphis, Phoenix, Nashville, Atlanta, and Charlotte, homes are relatively affordable, so you as a renter might feel tempted to buy your own place to call home. Remember, though, that from a financial point of view, in cities with a price to rent ratio of 21 or more, it is recommended to rent because rental rates are really low. Actually, if you have extra cash and want to grow it, it is a savvy decision in such markets to buy an investment property to rent out to other tenants while renting the home where you live. In this way, the money that you are putting into buying a real estate property will help you make more money in the form of rent. In reality, your tenants will be making your mortgage payments as well as covering the property tax, the insurance, and other rental expenses. So, if you are located in a market with low property prices and high price to rent ratio, definitely consider the option of investing in rental properties while renting.

Rents

As we saw above, markets with a high price to rent ratios do not have to have high property prices necessarily. Neither do they have to have low rents. If you are a renter in San Francisco or El Paso, you will have to pay more than $4,500 for housing each month.

However, it is still better to abstain from buying your own home there (if you can afford it at all) because property prices are even higher than rents. If you are worried about how you will be able to pay such an expensive rent, remember that these are just the average values for these markets. Actually, rents can vary widely from one neighborhood to another within the same city, so explore your options carefully and look for the cheaper neighborhoods before you settle on a property to rent. The time you spend on finding the right neighborhood to rent in will pay off quickly.

In other markets such as Memphis and Phoenix rental rates are so low that it becomes obvious right away why it’s better to rent than to buy a home.

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.

The high price to rent ratios (21 and above) guarantee that it is better to rent rather than to buy. You can use the extra cash that you save for making more money, such as by investing in real estate in these locations. After all, there must be plenty of other renters there, and it’s a great idea to be a landlord in such hot markets while renting your own property.

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.