Price-To-Rent Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 513
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Definition: Price-To-Rent Ratio

A mathematical number which is used to calculate the Trulia rent against the buy index that includes the total costs of owning a home as well as the total cost of renting a property which is similar. This formula for total costs of owning a home include the following components –

• Closing costs

• HOA dues wherever applicable

• Insurance

• Mortgage insurance wherever applicable

• Mortgage principal as well as interest

• Property taxes

• Tax advantages – including mortgage interest deduction

• Costs of renting – actual rent, renter’s insurance

It is used to compare owing or renting properties in certain cities. It uses the average list price and average yearly rent on a 2 bedroom condo/apartment/townhouse etc. which are listed on www.trulia.com which is a real estate search engine.

Price-to-rent ratio = Average list price /(12+Average rent)

Various values of the Price-to-Rent ratio can be interpreted as follows–

• 1 t0 15 – Buying is a much better option than renting

• 16-20 – Usually, better rent than buy

• 21 or higher – Renting is a much better option than buying

For example – the PTR ratio for Montreal is 32, while it is 58 for Vancouver.

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