Rent vs. buy, honestly

The standard version of this comparison puts the rent check next to the mortgage payment and calls whichever is smaller the winner. That comparison is wrong on both sides. A mortgage payment is mostly interest early on and mostly your own equity later; treating the whole thing as a cost overstates what owning actually takes from you. Rent, on the other hand, really is the whole cost — every dollar of it is gone the moment it's paid.

The honest version compares what never comes back on each side, not what leaves your account each month. Once you set it up that way, two things fall out for free: a workable rule of thumb for a quick gut check, and the real answer to what actually decides the comparison, which is how long you plan to stay.

What actually disappears, on each side

Renting is simple to account for: the entire rent payment is unrecoverable. None of it converts to an asset you own; all of it buys one month of housing and then it's gone. A renter's insurance premium sits alongside it, small but also unrecoverable.

Owning splits into two piles that get mixed together far too often:

• Unrecoverable: the interest portion of the mortgage payment, property tax, homeowners insurance, and ordinary maintenance and repairs. None of this comes back, no matter how the sale eventually goes.
• Recoverable, or at least not a cost: the principal portion of the mortgage payment, which converts cash into home equity you still own, and any price appreciation, which is real but not guaranteed and shouldn't be assumed in advance.

The mistake the payments-only comparison makes is lumping principal in with the true costs. Early in a mortgage, most of the payment is interest, so the mistake is small. Late in a mortgage, most of the payment is principal, and treating it as a cost badly overstates what owning is taking from you in that year. This is also why the honest comparison changes every year you hold the property — more on that below.

The down payment is not free money

The unrecoverable side of owning has one more line that's easy to miss because no check gets written for it: the return you give up on the down payment itself. Put $100,000 into a home instead of a diversified portfolio and you've spent the return that money would otherwise have earned — a real cost, even though nothing shows up on a bank statement. A reasonable stand-in for that foregone return is the long-run real return on a balanced portfolio, commonly estimated around 3% a year; how compound growth actually works is worth understanding before you dismiss that number as small, because it compounds the same way a mortgage balance does.

This opportunity cost applies specifically to the equity portion — the down payment, plus whatever principal has accumulated since. The interest you pay on the borrowed portion already reflects the lender's cost of capital, so it isn't double counted alongside the 3%; the two figures cover different slices of the home's price. Run your own equity-versus-invested comparison with the compound growth calculator using your actual down payment and time horizon.

The 5% rule, and where it breaks

A shorthand many advisers use to skip the full accounting: add up maintenance (roughly 1% of the home's value a year), property tax (varies widely by state and county, often around 1%), and the opportunity cost on tied-up capital (roughly 3%), and you land near 5% of the home's price per year as the unrecoverable cost of owning. Divide by twelve and compare it directly to the rent on a comparable place. Rent below that monthly figure favors renting; rent above it favors buying.

The rule is a fast filter, not a verdict, and it breaks in predictable ways. Property tax varies enough between counties and school districts that using a flat 1% can be off by half in either direction — check your actual local rate rather than trust the average. Maintenance on an older home or a large lot runs well above 1%; on a newer property with a homeowners association covering exterior upkeep, it can run under. And the 3% opportunity-cost assumption is only as good as what you'd genuinely have done with the money instead — if the honest alternative was sitting in a low-interest account rather than invested, use a lower figure and the rule tilts toward buying.

A worked example, both ways

Take a $500,000 home with a $100,000 down payment (20%, which also clears the private mortgage insurance premium required below that threshold) against a comparable rental at $2,600 a month. A $400,000 mortgage at 6% runs roughly $2,400 a month in principal and interest — about $23,800 of that is interest in the first year, and about $5,000 is principal. That split moves a little further toward principal every year after, even though the payment itself doesn't change on a fixed rate.

On this basis, owning costs about $6,800 more than renting in year one, purely on the unrecoverable side — before counting the $5,000 of equity built through principal, and before any price appreciation, which is excluded on purpose because it's uncertain. That gap is real, and it's also the most misleading number in the whole exercise if you stop reading here, because it's the largest the gap will ever be.

Run your numbersRent vs. buy→

Why time is the real decider

The gap above shrinks every year, for a mechanical reason that has nothing to do with home prices. As the mortgage amortizes, a growing share of that fixed payment is principal and a shrinking share is interest — so the unrecoverable side of owning gets cheaper every year even while the total payment stays flat. Rent does the opposite: it's 100% unrecoverable every year, and it typically rises with inflation on top of that. Two lines moving in opposite directions cross eventually; the only question is when, and that depends heavily on how much friction it costs to buy and sell in the first place.

That friction is the other half of the horizon story. Buying and later selling a $500,000 home typically costs somewhere in the range of $40,000 to $50,000 in total — an agent commission of roughly 5 to 6% when you eventually sell, plus closing costs of another 2 to 4% on the way in. That cost is largely fixed regardless of how long you own, so it gets divided by however many years you stay: spread across three years it's a heavy annual drag, spread across twelve it barely registers.

Rough years to break even, by price-to-rent ratio

	Rough years to break even, by price-to-rent ratio
Under 15	~2 years
15 to 20	~4 years
21 to 25	~7 years
Above 25	~10+ years

Price-to-rent ratio = home price ÷ one year of comparable rent. Illustrative bands, not a forecast — your actual breakeven depends on your mortgage rate, local property tax, and how rent and prices move from here.

The example above has a price-to-rent ratio of about 16 ($500,000 divided by $31,200 a year in rent), which lands in the band where owning typically overtakes renting within roughly four years — early enough that a household planning to stay five years or more is likely on the buying side of the honest comparison, even though the year-one table above looked like a clear win for renting. A household expecting to relocate for work within two or three years is looking at the same numbers and reaching the opposite, equally correct, conclusion.

Two things intentionally sit outside this math. Price appreciation, if it happens, helps whichever side owns — over long stretches home prices in most markets roughly track inflation, with individual periods well above and well below that trend, which is exactly why it's excluded from the unrecoverable-cost comparison rather than assumed. And whether paying the mortgage down faster than required is worth doing at all is a separate question from renting versus buying — extra payments versus investing covers that trade-off once you've decided to own.

What no spreadsheet can price

Even a careful version of this comparison leaves out the variables that often matter just as much in practice.

Flexibility cuts one way for a renter and the other way for an owner. A lease ends on a known date with a known cost; selling a home takes months, carries the transaction costs above, and depends on market conditions you don't control — a job offer in another city is a phone call for a renter and a financial event for an owner. Maintenance is a second axis: a landlord absorbs the failed furnace and the roof; a homeowner absorbs it personally, in both money and time, and the 1% maintenance estimate assumes you're paying someone else to do the work rather than doing it yourself.

Concentration risk belongs in this list too and rarely gets named. A home is typically the largest, least diversified, least liquid asset a household holds — a bet on one property in one neighborhood, sized far larger than any single stock position a reasonable investor would choose to hold. That's not a reason to avoid owning; it's a reason not to also skip diversifying everything else. And there's a genuine, non-financial value some households place on the stability of not being subject to a landlord's decision not to renew a lease — worth naming honestly rather than dressing up as a return the spreadsheet is somehow missing.

Deciding, in practice

Run the unrecoverable-cost comparison with your real numbers, not the rounded ones above — the rent vs. buy calculator does the arithmetic, and the affordability calculator checks that the mortgage payment itself fits your budget before the comparison matters at all. Then weight the result by how confident you are in your time horizon, because that confidence, more than the interest rate or the price-to-rent ratio, is what the whole comparison hinges on. A broader financial health checkup is worth doing alongside this one — the right answer to rent versus buy depends on the rest of the balance sheet, not just the housing line on it.