Rent vs Buy: The Complete Guide
One of the biggest financial decisions you'll make is whether to rent or buy a home. There's no universal right answer — it depends on your financial situation, lifestyle, local market, and how long you plan to stay.
This calculator compares the true cost of both options, accounting for appreciation, investment returns, and the hidden costs of homeownership.
The True Cost of Buying
Buying a home involves many costs beyond the mortgage payment:
| Cost | Typical Amount | Notes |
|---|---|---|
| Down payment | 3-20% of price | Ties up cash that could be invested |
| Closing costs | 2-5% of price | One-time at purchase |
| Mortgage P&I | Based on loan/rate | Your largest monthly cost |
| Property taxes | 0.5-2.5% annually | Varies wildly by location |
| Home insurance | $100-300/month | Required by lenders |
| Maintenance | 1-4% annually | Often underestimated! |
| HOA fees | $0-500+/month | If applicable |
| Opportunity cost | Varies | Returns you miss by not investing |
Maintenance Is Real
The True Cost of Renting
Renting isn't "throwing money away" — it provides flexibility and predictability:
| Cost | Typical Amount | Notes |
|---|---|---|
| Monthly rent | Market rate | Your main housing cost |
| Renter's insurance | $15-30/month | Much cheaper than homeowners |
| Annual increases | 2-5% typical | Can be more in hot markets |
| Security deposit | 1-2 months rent | Usually returned |
Renter's Hidden Advantage
The down payment and excess monthly costs that would go toward buying can be invested instead. At 7% average returns, a renter's investments can grow substantially.
The Break-Even Point
The break-even point is when buying becomes cheaper than renting. Key factors that affect it:
- Home appreciation rate (higher = faster break-even)
- Investment returns (higher = slower break-even)
- Rent growth (higher = faster break-even)
- Transaction costs of selling (typically 6-10%)
- How long you stay
Rule of thumb: If you'll stay less than 5 years, renting usually wins. 7+ years typically favors buying. 5-7 years is the toss-up zone.
The 5% Rule
A simplified way to compare rent vs buy:
Calculate 5% of the home's value ÷ 12 = equivalent monthly rent cost.
Example: $400,000 home × 5% = $20,000 ÷ 12 = $1,667/month
If you can rent a similar home for less than this, renting may be the better deal.
Why 5%?
When Buying Makes Sense
- You'll stay at least 5-7 years
- You value stability and control over your home
- Local rent is high relative to home prices
- You want to build equity instead of investment accounts
- You have a healthy emergency fund beyond down payment
- You're ready for maintenance responsibilities
When Renting Makes Sense
- You may move within 5 years
- Your job or life situation is uncertain
- Local home prices are very high relative to rent
- You prefer investing in the stock market
- You don't want maintenance hassle
- You're saving for a larger down payment
Common Mistakes in Rent vs Buy Analysis
- Only comparing mortgage payment to rent (ignores taxes, insurance, maintenance)
- Assuming homes always appreciate (they don't in all markets)
- Ignoring the opportunity cost of the down payment
- Assuming you'll stay forever (average is ~7 years)
- Forgetting transaction costs when selling (6-10%)
- Comparing different quality homes (rent vs buy)
Frequently Asked Questions
Q: Is renting always 'throwing money away'?
A: No! Renting pays for housing — a valuable service. The question is whether buying builds MORE wealth than renting + investing the difference. Sometimes it does, sometimes it doesn't.
Q: What home appreciation should I assume?
A: Historically, home prices appreciate 3-4% nationally. But local markets vary wildly. Some areas see 6-8%, others are flat or declining. Research your specific market.
Q: Should I buy if prices might drop?
A: If you're buying for the long term (10+ years), short-term prices matter less. But if you might sell soon, a dip could mean selling at a loss. Factor in your time horizon.
Q: What investment return should I use?
A: The S&P 500 has historically returned ~10% nominally (7% after inflation). Use 6-8% for conservative estimates. Higher assumptions favor renting more.
Q: Is there a 'right' answer?
A: No. It depends on your market, finances, lifestyle, and preferences. Some people value ownership; others prefer flexibility. Run the numbers and trust your priorities.
Making Your Decision
- Run this calculator with realistic inputs for YOUR market
- Consider minimum 5-year and 10-year scenarios
- Factor in transaction costs if you might sell early
- Be honest about maintenance and unexpected costs
- Consider non-financial factors (stability, control, flexibility)
- Don't buy more than you can comfortably afford
- Keep renting if buying would stretch you thin
The Best Investment
This calculator provides estimates based on the inputs you provide. Actual results depend on market conditions, behavior, and factors not modeled here. This is not financial advice. Consult a professional for your specific situation.