How to calculate price to rent ratio

Written by mark kennan
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How to calculate price to rent ratio
A high price-to-rent ratio may indicate an overpriced home. (selensergen/iStock/Getty Images)

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.

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Instructions

  1. 1

    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.

  2. 2

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

  3. 3

    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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