# Understanding the Price-to-Rent Ratio: Is Buying or Renting Better?

![Price-to-Rent Ratio](https://www.investopedia.com/thmb/PRhjXIzm68JB06x5xytKDYAU_zY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/price-to-rent-ratio.asp-final-052203789914439e98adcc5d881c4361.png)

*— Investopedia / NoNo Flores*

> **Definition**
>
> The price-to-rent ratio is a financial metric used to determine if renting is cheaper than buying real estate.

## What Is the Price-to-Rent Ratio?

The price-to-rent ratio compares home prices to annual rent, helping to determine if it's cheaper to rent or buy. This ratio is used as a benchmark for estimating whether it's cheaper to rent or own property. The price-to-rent ratio indicates if housing markets are fairly valued or in a bubble.

### Key Takeaways

*   The price-to-rent ratio serves as an indicator of whether a housing market is fairly valued or possibly in a bubble, offering insights into the decision to rent or buy a property in a given location.  
    
*   A price-to-rent ratio ranging from 1 to 15 suggests buying a home is more advantageous, while a ratio of 21 or more indicates renting is likely the better financial decision.  
    
*   Trulia’s Rent Versus Buy Index uses the price-to-rent ratio to compare the total costs of homeownership with renting, considering all associated expenses like mortgage interest, taxes, and insurance.  
    
*   The price-to-rent ratio provides a comparison between buying and renting but does not address the overall affordability of either option, as it might vary significantly between markets with similar ratios.

## How to Calculate the Price-to-Rent Ratio

The price-to-rent ratio is calculated by dividing the median home price by the median yearly rent and the formula for the price-to-rent ratio is as follows:

### ﻿ $\begin{aligned} &\text{Price-to-Rent Ratio} = \frac{ \text{Median Home Price} }{ \text{Median Annual Rent} } \\ \end{aligned}$﻿

## Understanding the Insights from the Price-to-Rent Ratio

The price-to-rent ratio is used as an indicator for whether housing markets are fairly valued, or in a bubble. The rising ratio before the [2008-2009 housing market crash](https://www.investopedia.com/articles/economics/09/subprime-market-2008.asp) was a warning sign of the bubble. Trulia produces a price-to-rent ratio called the Trulia Rent Versus Buy Index, which compares the total costs of [homeownership](https://www.investopedia.com/updates/first-time-home-buyer/) with the total cost of renting a similar property.

Homeownership costs include mortgage, taxes, insurance, [homeowners association](https://www.investopedia.com/terms/h/hoa.asp) (HOA) fees, and tax benefits like the mortgage interest deduction.

Trulia's thresholds suggest that a ratio of 1-15 favors buying, 16-20 leans toward [renting](https://www.investopedia.com/financial-edge/1112/reasons-renting-is-better-than-buying.aspx), and 21 or higher strongly favors renting[.](https://www.investopedia.com/financial-edge/1112/reasons-renting-is-better-than-buying.aspx)

## Additional Considerations When Using the Price-to-Rent Ratio

The price-to-rent ratio shows [whether buying or renting would be best](https://www.investopedia.com/articles/investing/012017/buying-vs-renting-san-francisco-bay-area.asp) for a particular property in a given market. The housing affordability index shows if an average family can afford a home based on prices and income. This index is most often used as a gauge for qualifying for a mortgage.

While the price-to-rent ratio compares the economics of buying versus renting, it says nothing about the overall affordability of buying or renting in a given market. Cities where both renting and buying are very expensive, such as San Francisco or New York, could have the same price-to-rent ratio as a small Midwestern town where both homes and rents are relatively cheap.

## Practical Example: Applying the Price-to-Rent Ratio

As of the second quarter of 2020, the median home value was $291,300.﻿﻿ The median home rent was $1,463 for August 2020.﻿﻿ The price-to-rent ratio, thus, was 16.6, or $291,300 / ($1,463 \* 12). This is across the U.S., but the price-to-rent ratio can also be calculated based on figures for a specific city.

> **Important**
>
> The total costs of renting factors in actual rent and renter's insurance.

For Trulia’s version of the price-to-rent ratio, it currently sits at around 18, suggesting it's better to rent than buy as of April 2020.﻿﻿

> **Article Sources**
>
> 1.  Trulia. "[Trulia’s Rent vs. Buy Index Reveals Top 10 Cities for Renting, Owning Homes](https://www.trulia.com/newsroom/press-releasesitem106119/)." Accessed Nov. 16, 2020.
>     
> 2.  National Association of REALTORS. "[Median Sales Price of Existing Single-Family Homes for Metropolitan Areas](https://www.nar.realtor/sites/default/files/documents/metro-home-prices-q2-2020-single-family-2020-08-12.pdf)." Accessed Nov. 20, 2020.
>     
> 3.  Yardi Matrix. "[Matrix Monthy - Aug. 2020](https://www.yardimatrix.com/Publications/Download/File/1089-MatrixMultifamilyNationalReport-August2020)." Accessed Nov. 20, 2020.
>     
> 4.  SmartAsset. "[Price-to-Rent Ratio in the 50 Largest U.S. Cities – 2020 Edition](https://smartasset.com/mortgage/price-to-rent-ratio-50-largest-cities-2020)." Accessed Nov. 24, 2020.