Short answer
Compare the true annual cost of owning — roughly 5% of the home's price per year in property taxes, maintenance, insurance, and the cost of capital tied up in the house — against rent on a comparable place. If owning costs more than renting, renting and investing the difference usually wins. The longer you expect to stay, the more buying's math improves, because transaction costs get spread over more years.
The 5% rule, at a glance
The unrecoverable slice of owning, per year.
= roughly 5% of the home's price per year, gone whether the house appreciates or not. If that number beats your annual rent, buying deserves a serious look.
The decision
You're deciding where to put your capital, not just where to live. Every dollar in home equity is a dollar not in the market — that's the opportunity cost most rent-vs-buy takes skip.
The honest comparison: unrecoverable costs of owning vs. rent, measured over your actual expected holding period. Principal payments aren't a cost (you keep that equity); interest, taxes, maintenance, and insurance are gone forever.
The simple rule — a rule of thumb, not a law
Rule of thumb: the unrecoverable costs of owning run about 5% of the home's price per year — roughly 1% property tax, 1% maintenance, and 3% cost of capital (mortgage interest plus the return your down payment could have earned elsewhere). If 5% of the price beats your annual rent, buying deserves a serious look.
Worked example
A $400,000 home:
Own
$20,000/yr
$400,000 × 5% in unrecoverable costs.
Rent
$19,200/yr
$1,600/month for a comparable place — roughly a wash, so holding period and stability decide.
When rent is cheaper
At $1,400/month rent ($16,800/yr), renting wins by $3,200/yr. Invested at 7% for 10 years ≈ $44,300 — the real price of buying in an expensive rental market.
Illustrative math, not personalized advice. Your numbers will differ.
What changes the answer?
Expected holding period
Under ~5 years, buying and selling transaction costs (often 8–10% round-trip) usually wipe out any advantage.
Local price-to-rent ratios
In cheap-rent cities buying often wins; in coastal job centers renting often wins. Your zip code matters more than the national debate.
Down payment size
A bigger down payment means less interest paid — but also more capital locked up earning ~0% instead of market returns.
Mortgage rate
Higher rates raise the unrecoverable slice of every payment. The 5% rule already bakes in typical rates; adjust if yours is far from typical.
Stability vs. mobility
Kids in school, a settled job, a community — non-financial value is real. Just don't pretend it's free.
Watch out for
- “Rent is throwing money away.” Mortgage interest, property taxes, maintenance, and insurance are thrown away too — count both sides.
- Forgetting maintenance. Budget ~1% of the home's value per year. Roofs and furnaces don't care about your spreadsheet.
- Buying for appreciation. That's speculation, not a plan. Buy because the math works at today's price.
- Stretching to the pre-approval max. The bank's ceiling is not your budget (see the 28/36 rule).
Run the numbers
Model your actual numbers — price, rent, rate, and holding period — instead of arguing from anecdotes.
Open the rent vs. buy modelWhat should you look at next?
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Last updated September 2026. General education for U.S. earners age 25–40 — not tax, legal, or investment advice.