The Rent Ratio

A quick calculation to weigh the benefits of renting vs. buying:

Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.

Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006. In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.

Follow the link and read how a life-long renter finally decided to take the plunge and buy his first home. And read my previous posts on the advantages of renting vs. buying.