● Money & small business
Rent vs buy by price-to-rent ratio: when buying pulls ahead at ratios from 10 to 30
The price-to-rent ratio is a quick way to size up a rent vs buy decision: home price ÷ a year's rent for a similar place. A $400,000 home that would rent for $2,300 a month has a ratio of 400,000 ÷ 27,600 = 14.5. The ratio doesn't answer the question alone, so here is what it means in years: when buying pulls ahead of renting at ratios from 10 to 30, with every other cost of owning and renting included. To use your own numbers, try the rent vs buy calculator.
The assumptions
A $400,000 home, 20% down, 3% closing costs, a 30-year mortgage, 1.1% property tax, $1,800 insurance, 1% a year for maintenance, and 6% selling costs when you sell. Rent rises 3.5% a year, plus $180 renters insurance. The renter invests the $92,000 the buyer spends up front, and whichever side is cheaper each month invests the difference at 6% a year. "Buying pulls ahead" means the first year in which the buyer, after selling, would have more than the renter. Only the rent changes between rows.
Break-even year by price-to-rent ratio and mortgage rate
Home prices grow 3.5% a year. The figure in brackets is buyer minus renter after 10 years.
| Ratio | Rent a month | 5.5% rate | 6.5% rate | 7.5% rate |
|---|---|---|---|---|
| 10 | $3,333 | year 2 (+$275,215) | year 3 (+$234,643) | year 3 (+$193,273) |
| 12 | $2,778 | year 3 (+$171,058) | year 4 (+$130,485) | year 5 (+$89,115) |
| 15 | $2,222 | year 5 (+$66,898) | year 8 (+$26,326) | year 13 (−$15,045) |
| 18 | $1,852 | year 11 (−$2,541) | year 26 (−$43,113) | not within 30 years (−$84,484) |
| 20 | $1,667 | not within 30 years (−$37,260) | not within 30 years (−$77,832) | not within 30 years (−$119,203) |
| 25 | $1,333 | not within 30 years (−$99,757) | not within 30 years (−$140,329) | not within 30 years (−$181,699) |
| 30 | $1,111 | not within 30 years (−$141,420) | not within 30 years (−$181,992) | not within 30 years (−$223,362) |
Home price growth changes the picture more
The same table at a 6.5% mortgage rate, with home prices growing 2%, 3.5% or 5% a year.
| Ratio | 2% growth | 3.5% growth | 5% growth |
|---|---|---|---|
| 10 | year 3 (+$170,483) | year 3 (+$234,643) | year 2 (+$308,220) |
| 12 | year 6 (+$66,326) | year 4 (+$130,485) | year 3 (+$204,063) |
| 15 | year 17 (−$37,834) | year 8 (+$26,326) | year 4 (+$99,903) |
| 18 | not within 30 years (−$107,273) | year 26 (−$43,113) | year 7 (+$30,464) |
| 20 | not within 30 years (−$141,992) | not within 30 years (−$77,832) | year 11 (−$4,255) |
| 22 | not within 30 years (−$170,400) | not within 30 years (−$106,240) | not within 30 years (−$32,663) |
| 25 | not within 30 years (−$204,489) | not within 30 years (−$140,329) | not within 30 years (−$66,752) |
What the tables say
- The often-quoted rule (below 15 favors buying, above 20 favors renting) holds up here, with a wide middle. At 6.5% and 3.5% growth, a ratio of 12 pays off in year 4, 15 in year 8, 18 only in year 26, and 20 or more never within 30 years.
- Between 15 and 20, the answer depends on things you can't know yet. At a ratio of 18, buying pulls ahead in year 7 if prices grow 5% a year and not within 30 years at 2%.
- Each point of mortgage rate moves the 10-year result by about $40,000 on this home. At every ratio in the first table, going from 5.5% to 6.5% or from 6.5% to 7.5% changes the 10-year gap by $40,572–$41,371.
- A low ratio doesn't rescue a short stay. Even at a ratio of 12, renting is ahead for the first 3 years at 6.5%: closing costs are spent on day one, and selling costs take 6% of the price.
Left out: income tax (mortgage interest deductions, capital gains), moving costs, and the value of flexibility or stability. The renter side assumes the savings really are invested. Every figure comes from the same month-by-month model as our rent vs buy spreadsheet, which was checked against an independent simulation. Not financial advice. For a year-by-year look at one example, see when buying actually pulls ahead.