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How to calculate price to rent ratio

Updated April 06, 2018

The price-to-rent ratio compares the rental cost of the unit per year to the market value of the home, similar to the way the price-to-earnings ratio of stocks compares the earnings of the company to the value of the stock. According to Bankrate, the average price-to-rent ratio over the long term is about 16, so if the ratio is higher than that, the home might be overpriced.

Multiply the monthly rent by 12 to find the annual rent. For example, if the monthly rent equals £800, you would multiply £800 by 12 to get £9,600.

Determine the market value of the home. You can use the listing price, a recent appraisal value or just an estimate.

Divide the price of the home by the annual rent to find the price to rent ratio. For example, if the value equals £163,200 and the annual rent equals £9,600, you would divide £163,200 by £9,600 to get a price to rent ratio of 17.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."