Ever wondered if a particular market favors home buyers or home renters?
If so, the price-to-rent ratio is a great tool to add to your tool belt.
Lets take a look at what is and how it works! 🙂
What is price to rent ratio
According to Investopedia…
The price-to-rent ratio is the ratio of home prices to annualized rent in a given location and is used as a benchmark for estimating whether it is cheaper to rent or own property.
So, in other words… its a measure of how much an area costs to own versus rent. This ratio / calculation can be useful in situations where you are relocating to a new city, investing in a unfamiliar market, or even determining if buying is the right choice for you.
Pretty cool right?
How do you calculate the price-to-rent ratio
The calculation is actually very simple…
Price-to-rent ratio = median home value ÷ median annual rent
Keep in mind, this calculation can be used in an entire market/metro area, city, state, or even an individual property that you are analyzing.
But… for purposes of discussion, lets calculate the price-to-rent ratio for Placer County, CA.
First and foremost, you must find the data points (i.e. median home price, and median annual rent). I usually start with google and then go down the list and try to find a reputable source.
In this case, Zillow seemed to have all the information we needed readily available.
Median home rice in Placer county: $495,800
Median rent in Placer county: $26,340 median annual rent (FYI – I had to calculate this manually because Zillow only provided the median monthly rent of $2,195.
$2,195 x 12 Months = $26,340 annually
Now that we have the data, lets calculate
$495,800 (median home price) ÷ $26,340 (median annual rent) = 18.83 % Price-to-rent ratio
Now that you have this data, how do you use it?
So, we calculated the price-to-rent ratio for Placer County, CA at 18.83%…
Well, there are several ways to interpret the data.
But… As a general rule, a higher price-to-rent ratio means that the market is less favorable to purchase a home and someone may be better off renting. Whereas a low price-to-rent ratio means that the market favors the buyers.
With that said, in order to form any opinions of a market, we would need to have some kind of guide.
Hmmm… I wonder where we could get some kind of guide? Oh, wait just a minute… I created one 🙂
I have put together a guide to use as reference – *Full disclosure, each market and each situation is different, so make sure to consult a professional before making any decisions using this data*
Price-to-rent ratio quick reference guide
Here is a quick reference guide to assist.
Price-to-rent ratio over 30% – This is less favorable to home buyers. Meaning the market favors renting. In other words, a person could likely rent a “like kind” property for less than the cost of owning it.
Price-to-rent ratio between 20-29% – These ratios are conducive of markets that are in the middle or neutral. If you are strategic in this type of market, you can likely find good opportunities with home ownership.
For instance, lets say you purchase home in a market that has a 22% price-to-rent ratio. The home is a cosmetic fixer which allows you to purchase under market and then fix it up. This increases the value of the property and drives up the amount you can charge for rent.
As a result, the ratio now swings a little more in your favor because in a couple years you may be able to sell with a 29-30% ratio. Nice little gain for you!
Price-to-rent ratio between 0-19% – Price-to-rent ratios within this range typically favors the home buyer. This means that rents are higher relative to the purchase price of the home. In some cases, a home may actually cost less to own than to rent.
There is also some great opportunity in these markets for investing in long term buy and hold rental properties if there are patterns of strong rent growth. So, don’t rely solely on the price-to-rent ratio… make sure you are analyzing multiple factors in a marketplace.
Want to see how our market compares to the rest of the country
I was curios… how does Placer County, CA compare to the rest of the country?
So, I did a little research and found a great write up on 50 major cities across the United States with a population over 250,000. Check out the full article here. – Spoiler alert – San Francisco, CA and New York, NY have ratios that crush ours… check it out!
Hope you found this information useful.
All the best!
Want to buy, sell, or invest in real estate?
Silva Realty Team can help!
We cover Sacramento & Placer County in California with a special focus on Roseville, Rocklin, Loomis, Penryn, Lincoln, Newcastle, Orangevale, & North Natomas (Sacramento).