Price to Rent Ratio
While the price to buy a home might have increased, so has the price to rent. Maybe, depending on where you live... but in Southern Maine, we know this to be very true about rent prices! The price to rent ratio can be used to help you determine whether it makes more sense to buy or if it makes more sense to rent (along with all the other things pointed out in our previous blog post "Renting vs Buying").
The price to rent ratio is:
Purchase price/(rent rate x 12)
If it is <20 = buy
If it is >20 = rent
There's a lot of different ways you can make this equation specific to you. Everyone is familiar with Portland, ME (and how the cost of living is pricier) so that's the market I decided to go with for this first example. The average home price in Portland is around $420,000. The average 1-bedroom rent is $1,356. Multiple the rent by 12 (to get the annual amount) and it equals $16,272. Finally, take the purchase price of $420,000 and divide it by $16,272. This gives you a price to rent ratio of 25.81% which means it actually makes more sense to rent in this area.
Now we'll look at Biddeford, ME for another example. One of my friends lives in a beautiful 1-bedroom apartment in Biddeford for $1,550/mo. That seems steep right? Well now imagine how you'd feel when they tell you they're increasing the price on her month-to-month lease to reflect $1,850/mo. The average home price in this area is $270,000 so when doing the price to rent ratio, you get a ratio of 12.19%. This means it would make a lot more sense for them to buy.
Last example for this blog. When looking at Lewiston, your average priced home is around $209,900. Average rent is $953. Your price to rent ratio for this area is 18.35%. This is really close to that neutral range of 20% so it isn't drastically leaning one way or the other, but it still makes slightly more sense to buy.
Keep in mind, this ratio does not reflect the overall affordability of an area. A place where renting and buying are very expensive could have the same price to rent ratio as a place where they're both very cheap. Do a little bit of research on the area you live or even the area you'd like to move to. Take a look at the numbers and see not only what makes the most sense to you, but what makes the most sense for that market area.