The housing price-to-rent ratio is the sales price or value of house divided by the annualized rental income from the property. Similar to a stock's price-to-earnings ratio, this calculation allows real estate investors to evaluate the earnings potential of property. Real estate investors also use this ratio when considering a property purchase and evaluating the listed selling price for the property.
Determine the sales price of the house. Alternatively, you could use the current appraised value of the property. For example, assume a house sold for $300,000.
Determine the rental price of the house. This represents the actual rent you receive for renting the property or the current market value of the monthly rent payment for the house. For example, assume the house rents for $2,000 per month.
Annualize the monthly rental figure by multiplying the monthly rental amount by 12. Continuing the same example, $2,000 x 12 = $24,000.
Divide the sales price or appraised value of the house by the annualized rental amount. Continuing the same example, $300,000 / $24,000 = 12.5. This figure represents the house price-to-rent ratio.