Rent vs. Buy: The Real Math Behind the 5% Rule

"Renting is throwing money away" sounds convincing — until you add up what owning actually costs. Here's the simple rule that settles the argument.

The problem with comparing rent to a mortgage payment

The most common rent-vs-buy comparison is also the worst one: monthly rent versus monthly mortgage payment. If rent is $1,800 and the mortgage payment is $1,700, buying looks like a no-brainer. But the mortgage payment is not the cost of owning — it's just the most visible part.

Owning a home comes with costs a renter never sees: property taxes, maintenance and repairs, homeowner's insurance, and the invisible cost of capital — the interest you pay on the mortgage plus the return your down payment isn't earning in the market. Some of these costs are unrecoverable no matter what the market does. That's the insight behind the 5% rule.

What the 5% rule actually says

The 5% rule, popularized by investor Ben Felix, says the unrecoverable costs of owning a home run about 5% of the home's value per year, broken down roughly like this:

• 1% — property taxes. The national median is a little over 1% of home value per year, though it varies wildly by state, from under 0.3% in Hawaii to over 2% in New Jersey.
• 1% — maintenance and repairs. Roofs, furnaces, plumbing, paint — the 1%-of-value-per-year estimate is the standard budgeting rule of thumb for a reason.
• 3% — cost of capital. This is the big one. It's the mortgage interest you pay (which dwarfs principal early on) plus the opportunity cost of your down payment sitting in bricks instead of index funds.

The rule itself is simple: take the home's price, multiply by 5%, and divide by 12. If you can rent an equivalent home for less than that monthly number, renting is probably cheaper. If rent is more, buying is probably cheaper.

Quick reference: a $300,000 home gives a threshold of $1,250/month. A $400,000 home gives $1,667/month. A $500,000 home gives $2,083/month.

Worked example: a $400,000 home at 7%

Let's check the rule against a full calculation. You buy a $400,000 home with 20% down ($80,000) and a $320,000 mortgage at 7% for 30 years.

1. 5% rule threshold: 0.05 × $400,000 ÷ 12 = $1,667/month. Rent below this: rent wins. Rent above it: buy wins.
2. Actual first-year costs: mortgage interest runs about $22,297 in year one. Property tax at ~1.1% adds $4,400. Insurance adds roughly $2,000. Maintenance at 1% adds $4,000. Total: about $32,697/year, or $2,725/month — before principal, which is savings, not cost.
3. The invisible piece: that $80,000 down payment could earn roughly $5,600/year in a 7% market return. Add that opportunity cost and the true annual cost of owning approaches $38,000 — over 9% of the home's value.

Notice something interesting: the actual costs run higher than the 5% rule suggests, which is the point. The rule is conservative — it tilts toward renting. If buying wins under the 5% rule, it almost certainly wins in reality.

The hidden costs renters skip and buyers forget

Two costs get the most attention in rent-vs-buy arguments, and both are systematically underestimated:

• Transaction costs. Buying costs 2–5% in closing costs; selling costs 6–9% in agent commissions, title fees, and repairs. On a $400,000 home, one full buy-sell cycle can eat $32,000–$40,000 — roughly 8–10% of the price. Move twice in a decade and you've vaporized $70,000.
• Early mortgage payments. In year one of that $320,000 loan at 7%, your monthly payment is $2,129 — but only about $272 of it is principal. The other $1,857 is interest. You are "building equity" far more slowly than the payment suggests.

On the flip side, the 5% rule's blind spot is appreciation and leverage. A 3–4% annual price gain on a $400,000 home is $12,000–$16,000/year — and you're earning it on the full $400,000 while only putting $80,000 down. Leverage is the strongest force on the buy side.

The breakeven horizon: how long you need to stay

The 5% rule answers the steady-state question — which side wins per year. The second question is time: buying has huge upfront costs, so how many years of "winning" does it take to catch up?

Because transaction costs run 8–10% of the price and early equity buildup is glacial, the math typically needs 5 to 7 years to turn in favor of buying. Sell in year three and the agent's commission plus closing costs will usually erase every dollar of appreciation and equity you built.

This is the single most practical takeaway: if you know you'll move within 3–5 years — a job change, a growing family, uncertainty about the city — renting is usually the better financial move even in a market where the 5% rule says buy. Time horizon matters as much as the monthly math.

How to use the rule in 60 seconds

1. Find the price of a comparable home (not a fixer-upper, not a luxury listing — a comparable home).
2. Multiply by 5% and divide by 12. That's your breakeven monthly rent.
3. Compare to what an equivalent rental actually costs in your market.
4. Then ask the horizon question: will you stay at least 5–7 years?

That's the whole decision in four steps. Rent below the threshold and you'll probably come out ahead renting — especially if you invest the down payment and the monthly difference. Rent above it with a long horizon, and buying is likely the wealth-building move.

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