Renting vs Buying: The 5% Rule Explained Simply

Renting vs buying comes down to one comparison most people never make. Not mortgage payment versus rent. Unrecoverable costs versus rent. That is what the 5% rule measures, and it takes about ten seconds.

Here it is. Take the price of the home. Multiply by 5%. Divide by 12. That number is the monthly breakeven rent. If you can rent a comparable place for less than that number, renting is likely cheaper. If rent costs more, buying is likely cheaper.

A $400,000 house: $400,000 times 5% is $20,000 a year, divided by 12 is $1,667 a month. A comparable rental at $1,400? Renting wins. The same rental at $1,900? Buying wins. One line of arithmetic, and you already know more than most house-hunting advice will tell you.

Why 5%?

The 5% is not a magic number. It is three costs added together, all of them money you never get back. Property taxes run about 1% of the home's value a year. Maintenance runs about 1%. The cost of capital, the mortgage interest plus the investment returns you give up on the money tied to the house, runs about 3%. That is the part people miss. Your down payment is not sitting in a vault. It is sitting in drywall, earning nothing, while the stock market does whatever it does without you.

Portfolio manager Ben Felix at PWL Capital popularized this framing in 2019, and it stuck because it reframes the question correctly. Rent is 100% unrecoverable. But so is a chunk of ownership. The question is never "rent versus mortgage." It is "rent versus the part of ownership that never comes back."

Where the rule goes wrong

The rule ignores appreciation, and that is a real hole. If the home gains 4% a year, buying can win even when the rule says rent. If it stays flat for a decade, the rule's verdict usually holds. It also ignores how long you stay. Buying only wins if you stay long enough for appreciation and principal paydown to cover the closing costs, the selling costs, and the years of unrecoverable spending. The usual breakeven horizon is roughly 5 to 7 years, and it stretches longer when rates are high.

It also assumes the renter invests the difference, which is the part nobody wants to hear. Renting's edge exists only if the gap between rent and ownership cost actually goes into investments. An uninvested gap is just cheaper rent and a smaller future. What buying's premium actually purchases is stability: a payment no landlord can re-price, a home nobody can decline to renew, and an asset at the end if the stay outlasts the breakeven.

Tune it to your market

The 5% is a starting point, not scripture. Use 4% when property taxes are very low, under 0.7%, or when rates are low. Use 6% when taxes run over 1.5%, insurance is expensive, HOA fees are significant, or rates are high. In a high-tax, high-rate market, the honest version of the rule might be the 6% or 7% rule, and the verdict flips toward renting for a lot of homes that feel buyable.

Home price	5% breakeven rent	Verdict if rent is $1,800
$300,000	$1,250/mo	Rent wins
$400,000	$1,667/mo	Rent wins
$500,000	$2,083/mo	Buy wins
$600,000	$2,500/mo	Buy wins

My take: run the rule first, then argue about the soft stuff. Stability, control, the freedom to paint a wall, the freedom to leave in a year, those are real and they matter. But they are easier to weigh honestly after the math has had its say. The rule will not make the decision for you. It will keep you from making it on slogans.