What is the 5% rule for renting vs buying?
Multiply the home price by 5% and divide by 12; if comparable rent is below that, renting is likely the better deal. For a $420,000 home: $420,000 × 5% ÷ 12 = $1,750. Rent of $2,200 is above it, so buying is competitive if you stay long enough.
Where the 5% comes from
| Component | Share of value/yr | What it represents |
|---|---|---|
| Property tax | ≈1% | Varies 0.3%–2.2% by state |
| Maintenance | ≈1% | Repairs, replacements |
| Cost of capital | ≈3% | Blend of mortgage interest and forgone equity return |
| Total | ≈5% | Annual unrecoverable cost of owning |
How to read this table
- Total sits at the top of the table (≈5%) — annual unrecoverable cost of owning. If your situation looks like this row, plan against the upper half of the range rather than the midpoint.
- Property tax anchors the bottom (≈1%) — varies 0.3%–2.2% by state. Treat this as the conservative case you should still be profitable at.
- The gap between the top and bottom row is roughly 5.0×. That spread is why a single blended average is close to useless here — pick the row that matches your setup instead of averaging the column.
- With 4 reference points in the "where the 5% comes from" table, the fastest way to use this page is to find the closest row, take its share of value/yr, then stress-test it ±30% before you build a plan on it.
Context
The 5% rule is a quick screen, not a full model — at 6.5% mortgage rates the cost-of-capital component is closer to 4%, making the threshold nearer 6%. The net-worth calculator replaces the rule with explicit inputs.
What moves this number
Financing terms
Rate, down payment and amortisation drive cash-on-cash return more than purchase price does. The same building can cash-flow or bleed depending on the loan.
True operating expense ratio
Management, insurance, tax, maintenance, vacancy and capital reserve typically consume 35–50% of gross rent. Models that skip reserves overstate returns badly.
Vacancy and turnover
One 45-day vacancy plus a turn can erase a year of thin cash flow. Underwrite 5–8% vacancy even in tight markets.
Local regulation
Rent rules, short-term rental caps and licensing requirements change the achievable revenue of an identical property between neighbouring cities.
Methodology
Threshold rent = price × 5% ÷ 12. Rule popularised by PWL Capital's Ben Felix (2021). Higher-rate adjustment is our estimate using the 6.5% default rate.
Assumptions and caveats
- Returns exclude appreciation and principal paydown unless a row states otherwise.
- Local tax, insurance and regulation can move these figures by several points in either direction.
- This page was last reviewed on 2026-10-01. Ranges are updated as new data lands, so re-check before using them in a contract or a plan.
- Use these numbers as a starting range, not a guarantee — your own historical data always beats a benchmark.
Frequently asked questions
What is the 5% rule for renting vs buying?
Multiply the home price by 5% and divide by 12; if comparable rent is below that, renting is likely the better deal. For a $420,000 home: $420,000 × 5% ÷ 12 = $1,750. Rent of $2,200 is above it, so buying is competitive if you stay long enough.
Which option pays the most in the where the 5% comes from table?
Total, at ≈5% (Annual unrecoverable cost of owning). That row represents the strongest case in this dataset, so use it as an upper bound rather than an expectation.
What is a realistic low-end figure?
Property tax at ≈1% (Varies 0.3%–2.2% by state). Plan your costs so the low end still works, then treat anything above it as upside.
Why do the numbers vary so much?
The spread between the highest and lowest row is about 5.0×. Financing terms and true operating expense ratio explain most of that gap — see the drivers section above for the full list.
Where do these numbers come from?
Threshold rent = price × 5% ÷ 12. Rule popularised by PWL Capital's Ben Felix (2021). Higher-rate adjustment is our estimate using the 6.5% default rate.
How can I estimate my own number instead of using a benchmark?
Use the Rent vs Buy Net Worth Calculator on RevenueLab — it takes your own inputs and returns a figure specific to your setup, which is always more accurate than a published range.
Model your own numbers
Related reading
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Last updated 2026-10-01.