Rent or Buy a Home? A Simple Way to Decide With Real Numbers

"Renting is throwing money away" is one of the most repeated pieces of financial advice, and one of the most misleading. Owners also "throw money away": on mortgage interest, property taxes, insurance and maintenance. The real question is which option costs less in money you never get back, and what you do with the difference. This guide gives you a simple, numbers-based way to decide.

Compare unrecoverable costs, not monthly payments

A mortgage payment and a rent check are not equivalent. Part of a mortgage payment builds equity, which is like saving. The fair comparison is between unrecoverable costs: money that leaves your pocket and never comes back.

• Renter: rent (and renter's insurance).
• Owner: mortgage interest, property taxes, homeowner's insurance, maintenance and the opportunity cost of the down payment, which could have been invested instead.

The 5% rule

A popular rule of thumb, used by many financial planners, estimates the annual unrecoverable cost of owning as about 5% of the home's value:

• about 1% in property taxes,
• about 1% in maintenance and repairs,
• about 3% in cost of capital (mortgage interest plus the return you give up on the down payment).

Multiply the price by 5% and divide by 12. If you can rent a similar home for less than that, renting is likely cheaper; if rent is higher, buying is likely cheaper.

Example: a $400,000 home.

$400,000 × 5% = $20,000 per year ÷ 12 = $1,667 per month

If a comparable home rents for $1,500, renting (and investing the difference) is the better financial deal. If it rents for $2,100, buying looks better.

The percentages are assumptions. Where property taxes are higher, homes are older or mortgage rates are high, the "right" number may be 6% or more. Adjust the rule to your situation.

The price-to-rent ratio

Another quick check is the price-to-rent ratio: home price ÷ annual rent for a similar property.

$400,000 ÷ ($1,800 × 12) = 18.5

As a loose guide, ratios below about 15 tend to favor buying, ratios above about 20 tend to favor renting, and in between it depends on the details. Expensive cities often have ratios of 25 or more, which is why renting is often the rational choice there.

Time is the biggest factor

Buying and selling are expensive. Closing costs, agent commissions and taxes can add up to 8–10% of the price over a purchase and later sale. If you move after two or three years, those costs usually wipe out any gain. Many analyses find that buying only starts to beat renting after about five to seven years, depending on prices and rates. If you aren't sure you will stay that long, renting keeps you flexible.

What tips the balance toward buying

• You plan to stay for many years.
• Local rents are high compared with prices (low price-to-rent ratio).
• You can get a fixed-rate mortgage at a reasonable rate.
• You value stability and the freedom to renovate.
• You would not actually invest the money if you rented (forced savings).

What tips the balance toward renting

• You may move for work, family or study in the next few years.
• Prices are very high compared with rents.
• Your down payment would empty your emergency fund.
• You are disciplined about investing the money you save.
• You don't want the time and risk of maintenance.

Run your own numbers

Rules of thumb are a starting point. The rent vs. buy calculator compares two scenarios over the same period: buying with a mortgage, and renting while investing the down payment and any monthly difference. Enter the home price, rent, down payment, mortgage rate, expected investment return and home appreciation to see which path leaves you with more net worth.

Frequently asked questions

Is renting really throwing money away?

No. Owners also have unrecoverable costs such as interest, taxes, insurance and maintenance. What matters is which option costs less and what you do with the money you save.

What is the 5% rule for renting vs. buying?

It estimates the yearly unrecoverable cost of owning as about 5% of the home's value. Divide that by 12 and compare it with the rent for a similar home.

How long do I need to stay for buying to make sense?

Often five to seven years or more, because buying and selling costs can reach 8–10% of the price.

What is a good price-to-rent ratio for buying?

As a loose guide, below about 15 tends to favor buying and above about 20 tends to favor renting.

Informational content only. For legal, financial or health decisions, consult a qualified professional.