Rent vs Buy: The Real Math

The naive comparison and why it fails

The most common rent vs buy comparison: "My rent is $2,500/month and my mortgage would be $2,800/month, so buying costs $300/month more." This comparison is wrong in at least five ways:

1. It compares only the mortgage payment to rent, ignoring property tax, insurance, HOA, and maintenance (typically $800-$2,000/month for a mid-priced home)
2. It treats the down payment as "saved money" rather than capital with opportunity cost
3. It ignores selling costs at exit (typically 6-9% of sale price)
4. It doesn't account for how slowly mortgage principal builds in early years
5. It assumes you'll stay in the home long enough for appreciation to dominate, when most buyers actually sell within 5-7 years

The components of true cost of ownership

Mortgage payment

In early years, mortgage payments are mostly interest, not principal. A $400,000 mortgage at 6.5% has total monthly payment around $2,530. Of that, approximately $2,170 is interest in the first month, and only $360 builds equity. Year 5: roughly $2,000 interest and $530 principal. Year 10: $1,790 interest and $740 principal.

This matters because interest is rent paid to the lender. It builds no equity for you. In early years of a 30-year mortgage, 85%+ of your payment goes to interest, which is functionally indistinguishable from rent.

Property tax

Highly variable by location. Roughly 1.1-2.5% of home value annually in most US markets, 0.5-1.5% in most European markets. A $500,000 home in a high-property-tax state costs $10,000-$12,500/year in tax alone — $830-$1,040/month before any other cost.

Insurance

Homeowners insurance typically $80-$200/month depending on home value, location, and coverage. Plus required earthquake or flood insurance in some markets.

HOA fees

For homes in associations or condominiums, monthly HOA fees range from $100 to $1,000+. Often overlooked in initial calculations.

Maintenance

Standard rule: 1-3% of home value annually. For a $500,000 home, that's $5,000-$15,000/year, or $420-$1,250/month. Some years require little; others require new roof, HVAC, or major repairs. Plan for the average.

Selling costs

When you eventually sell: realtor commissions (5-6% in most US markets), transfer taxes (varies), title insurance, attorney fees, staging, and pre-sale repairs. Total: typically 6-9% of sale price. On a $600,000 sale, that's $36,000-$54,000.

The 5% rule of thumb

A widely-cited rule from Ben Felix (Canadian financial planner): the true unrecoverable cost of homeownership annually is roughly 5% of the home's value, divided into three components:

• Property tax + insurance + maintenance: ~2-3% of home value annually, depending on location
• Mortgage interest (effective rate after potential tax benefit): ~3-4% of remaining loan balance, but this only applies to the mortgage portion
• Opportunity cost on equity: ~3-5% of equity value annually (the spread between what equity could earn elsewhere vs implicit return from "owning")

For a fully-equity-financed property at $500,000, this is $25,000/year or ~$2,080/month in unrecoverable cost just to own. For a mortgage-financed property, the math changes but the order of magnitude is similar.

If rent for the same property would cost less than this unrecoverable cost, renting is mathematically cheaper. If rent exceeds it, buying is cheaper.

The break-even years

Buying has high transaction costs (closing costs, eventually selling costs) and low early-year equity buildup. Renting has none of these but no equity accumulation either. The break-even point — when buying becomes financially superior to renting — depends on:

• Home price relative to rent in your specific market
• Expected appreciation
• Opportunity cost on your down payment
• How long you'll stay

In typical markets at current rates (2026), break-even ranges from:

• 3-5 years: Low-cost markets with strong appreciation and high rent-to-price ratios
• 5-8 years: Mid-cost markets with moderate appreciation
• 8-12 years: High-cost markets with low rent-to-price ratios (San Francisco, NYC, Vancouver, London center)
• Never (during current ownership window): Very high-cost markets where rent-to-price ratios are so low that renting and investing the difference outperforms buying indefinitely

Critical: most home buyers actually sell within 5-7 years (job changes, family changes, relocation). If your break-even is 8 years and you sell at year 5, you lost money on the buying decision even if the market "appreciated."

The price-to-rent ratio shortcut

Price-to-rent ratio (P/R) is a quick filter: home price divided by annual rent for equivalent property.

• P/R below 15: Buying is likely cheaper than renting in most scenarios
• P/R 15-20: Roughly neutral; depends on specific assumptions
• P/R 20-25: Renting and investing the difference often wins
• P/R above 25: Renting almost always wins financially; buying is a lifestyle/non-financial decision

Example: $600,000 home with comparable rental at $2,500/month = $30,000/year rent. P/R = 600,000 / 30,000 = 20. Roughly neutral, depending on specific assumptions about appreciation and opportunity cost.

Another example: $1.5M home in San Francisco with comparable rental at $4,500/month = $54,000/year rent. P/R = 1,500,000 / 54,000 = 27.8. Renting and investing wins decisively in this scenario in most reasonable models.

When buying wins despite the math

Several scenarios favor buying even when pure financial math is neutral or slightly negative:

• Long time horizon (15+ years): Transaction costs amortize across more years; equity buildup compounds; rent inflation eventually exceeds fixed mortgage payments
• Behavioral commitment: If you'd spend the alternative savings rather than invest them, forced equity buildup wins
• Tax-advantaged ownership: US mortgage interest deduction (limited), capital gains exclusion ($250K single / $500K married), and similar policies in other countries
• Specific home value: If you have unusual housing requirements that the rental market doesn't serve (large family, specific accessibility needs, pet limitations), owning may be the only practical option
• Local market dynamics: Markets with structurally low supply and strong demand have historically favored buyers; markets with overbuilding have favored renters

The honest summary

Whether to rent or buy is not purely a financial decision. Lifestyle, stability, family considerations, and non-financial factors all matter and often outweigh the math. But you should know what the math says before making the decision.

For most people in most markets at current rates, the financial answer is more nuanced than "buy if you can" or "rent is throwing money away." Both narratives are wrong in important ways.

Use the WealthCompass rent vs buy calculator with realistic inputs for your situation. Try multiple time horizons (5, 7, 10 years). See how sensitive the answer is to your appreciation assumption and your alternative-investment return assumption. The calculator includes opportunity cost on the down payment by default, which is the variable most other calculators miss.