Rent Ratio Tells You Whether Renting or Buying Is the Better Deal

When deciding whether to rent or purchase a home, it is not enough to consider home prices and mortgage rates. Buyers also need to look at rental rates for similar properties to determine whether it is economically more feasible to purchase or rent on a long-term basis. A useful tool is the rent ratio, or the ratio of the home’s purchase price divided by the annual rent of a comparable property. For example, a three-bedroom house in today’s market might cost $500,000, while the annual rent for such a home might be $24,000, or $2,000 a month. The rent ratio here is 21. Experts vary in their views as to where the tipping point in the rent ratio is, but most would place it somewhere between 15-20. The higher the ratio, the more a buyer would need a spike in housing prices in the coming years to justify paying such a high price today. Therefore, at those levels it makes more sense to consider renting. On the other hand, with a rent ratio below 15, it may be practical to consider purchasing a home rather than renting at least from a strictly financial point of view. | Read More