You are considering shopping for a home and finding ways to make your final decision to buy or rent. By using price to rent ratio indicator will make your decision processing so much faster. Not only faster it will make your decision more decisive. So how come can price to rent ratio help me as a find a new home. To either buy or to rent.
Down below Pattaya City Condo we are going to explain. What is price to rent ratio? How to calculate price to rent ratio calculation. More importantly to making your decisive decision for better investments or to find a valuable home to rent.
What is Price to Rent Ratio
Price to rent ratio is a metric that compares the cost of purchasing a property to the cost of renting a similar property in the same location. It is calculated by dividing the average home sale price by the average annual rent in a given area. The resulting ratio indicates the number of years it would take for the rental income to cover the property's purchase price.
Generally, a high price-to-rent ratio indicates a favorable market for rental properties. Conversely, a low ratio suggests that more people may prefer to buy rather than rent, provided they find the right property at the right price and have the down payment for a mortgage.
How to Calculate Price to Rent Ratio
To calculate the price-to-rent ratio, we need two key pieces of information: the sale price of the property and the estimated monthly rent.
Sale Price: The sale price of the property is ฿6,800,000.
Estimated Rent: The estimated monthly rent for the property is ฿46,800.
Now, let's calculate the price-to-rent ratio:
- Price-to-Rent Ratio = Sale Price / (12 * Estimated Rent)
- Price-to-Rent Ratio = ฿6,800,000 / (12 * ฿46,800)
- Price-to-Rent Ratio = ฿6,800,000 / ฿561,600
- Price-to-Rent Ratio = 12
The calculated price-to-rent ratio for this property is 12. This means that it would take approximately 12 years of rental income to cover the purchase price of the property.
But do remember that price to rent ratio is not the only indicator to choose between buying or rent a home. You would need to check rental yield calculation, if you are choosing to buy a home. For a guide on how to rental yield calculation, check out two ways to calculate rental yield.
Now with the price to rent ratio calculation. You can slowly start to consider if you want to buy a home. Or you want to rent a home.
Price to Rent Ratio to Buy Home
From the example above we can use the price to rent ratio and calculate your home buying process.
Calculate the median home price:
- Median Home Price = Estimated Rent x Price to Rent Ratio
- Median Home Price = ฿46,800 x 12 Median Home Price = ฿561,600
Rent a Home with Price to rent ratio
On the other from the above example you can decide if renting is actually better for you in the moment. With the same formula use.
- Median Annual Rent = Median Home Price / Price to Rent Ratio
- Median Annual Rent = ฿561,600 / 12 Median Annual Rent = ฿46,800
As these are home prices in Thailand. We are going to show trends on home prices in Thailand on which regions are better to rent or to buy by using price to rent ratio formula. For you to have a better chance to decide with full confidence.
Interpreting the Price-to-Rent Ratio:
A high price-to-rent ratio suggests that property prices are relatively expensive compared to the rental market. In such scenarios, it may be more financially beneficial to rent rather than buy. As your return on investment from rental income might not be sufficient to cover the high purchase price.
Conversely, a low price-to-rent ratio indicates that properties are relatively more affordable compared to the rental market. In these instances, it could be an opportune time to consider buying, as the potential for generating positive cash flow from rental income is higher.
To fully understand if it the correct time for you to purchase a new home. Here is a full guide on you to decide if I should rent or buy a home.
Limitations on Price to Rent Ratio
Other factors such as maintenance costs, property taxes, potential appreciation, and personal financial goals must also be considered. Additionally, it is essential to recognize that the P/R ratio is a general indicator and may not accurately reflect the profitability of every property within a given area.
So for other factors to consider you want to buy or a rent a home. You can use cash on cash calculation to see your ROI in your home buying process. Also for free real estate calculator. Check the button below for gross rental yield and even a calculator to check if you want buy a property right now or not.
