Rent vs buy: what the 5% rule actually says in 2026
Short answer
Compare rent to unrecoverable costs, not to the mortgage payment. Buying burns roughly 5% of the home's value each year — about 1% maintenance, 1% property tax, and 3% cost of capital — so a $500,000 home costs around $2,083/month in pure waste before any principal.
Option A
Renting
Pay for shelter with no ownership stake and no maintenance liability.
Strengths
- Zero maintenance, property tax, or repair exposure
- Mobility — leaving costs one month's notice, not 6–9% in transaction fees
- Down payment stays invested and liquid
- Housing cost is capped and predictable within a lease term
Trade-offs
- No equity accrual and no inflation hedge on your housing cost
- Rent rises with the market, indefinitely
- No control over renovations, pets, or renewal
Option B
Buying
Own the property with a mortgage, building equity and taking on all costs.
Strengths
- Principal payments convert cash into equity
- A fixed-rate payment freezes most of your housing cost against inflation
- Leverage amplifies appreciation on the full property value
- Control, stability, and potential tax deductions
Trade-offs
- Roughly 5% of value per year is unrecoverable before any principal
- 6–9% of value in transaction costs to buy and sell
- Maintenance and special assessments are unpredictable
- Illiquid — you can't sell 10% of a house in a bad month
Head-to-head
| Metric | Renting | Buying |
|---|---|---|
| Unrecoverable annual costEven | 12 × monthly rent | ~5% of property value |
| Transaction cost to exitA | ~0% | 6–9% of sale price |
| Maintenance exposureA | $0 | ~1% of value/year |
| Equity accrualB | None | Principal + appreciation |
| Break-even holding periodEven | n/a | 4–7 years typical |
| LiquidityA | High | Low |
Badge marks which option wins that row: A = Renting, B = Buying.
Buying wins past a 5–7 year hold, and loses badly under three.
Transaction costs dominate short holds: 7% round-trip on a $500,000 home is $35,000, which takes several years of principal and appreciation to recover. Run the 5% rule first — 5% of $500,000 is $25,000/year, or $2,083/month. If comparable rent is below that, renting and investing the difference wins financially over short horizons. If rent is above it, buying is cheaper from year one, assuming you stay long enough to clear closing costs.
Worked example: $500,000 home versus $2,400/month rent, 6.4% mortgage
- Property tax at 1.1% = $5,500/year
- Maintenance at 1% = $5,000/year
- Cost of capital: $100,000 down × 4.5% opportunity cost = $4,500
- Mortgage interest year one on $400,000 at 6.4% ≈ $25,400
- Insurance $1,900. Total unrecoverable ≈ $42,300/year = $3,525/month
- Renting: $2,400/month = $28,800/year, plus $100,000 invested at 7% = +$7,000
- Net renting cost ≈ $21,800/year
Renting is about $20,500/year cheaper at these rates unless the home appreciates more than roughly 4.1% annually — which is exactly the bet a buyer is making.
The verdict
Choose Renting
Rent if your horizon is under four years, your market's price-to-rent ratio exceeds 20, or your career may move you.
Choose Buying
Buy if you'll hold 7+ years, rent locally exceeds 5% of purchase price annually, and you have reserves beyond the down payment.
Or run both
Whichever you choose, only the difference actually invested counts — 'renting and investing the difference' fails when the difference gets spent.
Frequently asked questions
What is the price-to-rent ratio rule?
Divide the purchase price by annual rent. Under 15 favours buying, 16–20 is neutral, over 21 strongly favours renting in that market.
Does the mortgage interest deduction change this?
For most filers, no. The standard deduction exceeds itemized housing deductions unless the loan is large or state taxes are high.
How much should I hold in reserves after closing?
Six months of full housing cost plus 1% of the home value for the first year of surprises. Buyers who close with an empty account are the ones who sell at a loss.
Methodology
Uses the standard 5% unrecoverable-cost framework with 2026-typical US rates: 1% property tax, 1% maintenance, and a 4.5–5% opportunity cost of capital. Local tax rates, HOA fees, and insurance vary widely — run your own numbers.
Run your own numbers
- Rent Affordability Calculator
- Closing Costs Calculator
- Mortgage Extra Payment Calculator
- All revenue answers
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Last updated 2026-08-12. Machine-readable version: /api/public/comparisons.json. Free to cite with attribution to RevenueLab.