Rent vs Buy: How to Run the Numbers Honestly
Comparing your rent with a mortgage payment is the most common way to decide whether to buy, and also the most misleading. A fair comparison looks at the costs each option never gives back, and at how long you will stay.
Key takeaways
- Compare rent with the unrecoverable costs of owning, not with the full mortgage payment.
- The 5% rule estimates those costs at about 5% of the home’s value per year.
- For a $400,000 home that is about $20,000 a year, or $1,667 a month. Similar rent makes renting competitive.
- Buying usually needs a stay of five years or more to cover the costs of buying and selling.
Why the monthly payment comparison fails
A mortgage payment contains principal, which is money moved into your own equity rather than spent. It also leaves out property tax, insurance, repairs, and the return your down payment could have earned if you had invested it. Comparing “rent $2,000 vs mortgage $2,300” therefore says little about which is cheaper.
Unrecoverable costs: the fair comparison
Unrecoverable costs are what you pay and never see again. For a renter it is mainly rent, plus renter’s insurance. For an owner it is:
- Mortgage interest (not principal).
- Property tax (council tax in the UK is paid by renters and owners alike, so it cancels out there).
- Maintenance and repairs, commonly estimated at about 1% of the home’s value a year, more for older homes.
- Insurance and any service charges or HOA fees.
- Cost of capital: the return your down payment and equity could earn invested elsewhere.
The 5% rule as a quick screen
A widely used shortcut, popularised by Canadian investor Ben Felix, adds up typical unrecoverable costs as a share of the home’s value:
≈ 1% property tax + 1% maintenance + 3% cost of capital = 5% a year
For a $400,000 home: 5% × $400,000 = $20,000 a year, or about $1,667 a month. If you can rent a comparable home for less than that, renting is likely the cheaper choice financially. If rent is clearly higher, buying starts to look better.
Adjust the percentages to your situation. Property tax in some US states is well under 1%; in others it is over 2%. When mortgage rates are high, the cost of capital is higher too. The rule is a screen, not a verdict.
Enter the home price, your rent, rates and how long you expect to stay, and compare the total cost of each path over the same period.
The time horizon problem
Buying and selling are expensive. Closing costs, transfer taxes, agent fees and moving costs can easily add up to 6% to 10% of the price across a purchase and sale. In England and Northern Ireland, Stamp Duty can add thousands more. Those costs are fixed whether you stay two years or twenty, so the longer you stay, the more thinly they are spread.
That is why the same home can be a poor purchase for someone moving in three years and a good one for someone staying fifteen. Before anything else, ask how confident you are about where you will live in five years.
What the numbers leave out
Reasons to favour buying
- Stability and control: no landlord deciding to sell or raise rent.
- A fixed-rate mortgage locks in most of your housing cost while rents may rise.
- Paying down a mortgage acts as forced saving for people who would not invest the difference.
Reasons to favour renting
- Flexibility to move for work or family without selling.
- No exposure to large repair bills or a local price fall.
- Your savings stay diversified and liquid instead of concentrated in one property.
The renter’s side of the deal
Renting only wins financially if the renter actually invests the money the owner would have tied up: the down payment, and any monthly difference between owning and renting costs. If that money is spent instead, the owner’s equity usually comes out ahead over time. Be honest about which behaviour describes you.
A simple process
- Estimate how long you will stay. Under about five years, renting usually wins.
- Apply the 5% rule to the price of the home you would buy and compare with local rent.
- Run a detailed buy-vs-rent calculation with your own rate, taxes and costs.
- Check affordability using your debt-to-income ratio and keep an emergency fund after the down payment.
- Weigh the non-financial factors last, once you know the price of each choice.
Frequently asked questions
Is renting really throwing money away?
No. Rent buys housing and flexibility. Owners also have costs they never get back: mortgage interest, property tax, maintenance, insurance and the return their down payment could have earned elsewhere. The fair comparison is rent versus those unrecoverable costs.
What is the 5% rule?
A rough estimate that the yearly unrecoverable cost of owning is about 5% of the home’s value: roughly 1% property tax, 1% maintenance and 3% cost of capital. Divide by 12 to compare with monthly rent.
How long do I need to stay for buying to pay off?
Often five years or more, because buying and selling costs (closing costs, stamp duty, agent fees) are large and need time to be spread out. The exact break-even depends on prices, rents and rates where you live.
Should I include home price growth?
Yes, but cautiously. Use a modest long-run assumption, and test a flat-price scenario too, because local prices can stall for years.
Sources
This guide is general information to help you understand the numbers. It is not financial, tax or legal advice. Rates, limits and rules change, so check official sources or a qualified adviser before making a decision. Read our full disclaimer.