Rent or Buy a Home? Run the Numbers, Not the Folklore
By The Bureau of Wealth Team 1153 words
This article is general information, not financial advice. Consider your own circumstances or speak to a qualified adviser before acting on it.
Buying beats renting only after enough years to earn back closing costs, selling costs and the money an owner never gets back. Here's how to find your break-even year.
Buying beats renting only if you stay long enough to recover the costs of getting in and out, and only if the home's value, your rent and your investments behave the way you assume. In our example below, a $350,000 home against $2,000 a month of rent takes eight years to come out ahead. Change one assumption and that becomes four years, or never. So the useful question isn't "rent or buy?" but "how many years until buying wins for me, and will I stay that long?" This guide is for renters weighing a first purchase who want a number, not a slogan.
Why "renting is throwing money away" is only half true
Rent is money you don't get back. So is a large part of owning. On a $315,000 loan at 6.5% over 30 years, our amortization schedule calculator shows the first monthly payment of $1,991 splitting into $1,706 of interest and just $285 of principal. Only the principal builds equity.
On top of that come costs a renter never pays. The Consumer Financial Protection Bureau reminds buyers that homeowner's insurance, property taxes, and repairs and maintenance belong in the budget. Its homebuying worksheet uses 1.1% of the home's value as a national median property tax rate, while warning that rates vary widely, and gives 1% of the price a year for maintenance as a common rule of thumb. Then there are closing costs to buy and agent and other costs to sell.
The fair comparison is the money each option loses for good: rent for the renter; interest, taxes, insurance, maintenance and transaction costs for the owner. Equity growth and price appreciation are what the owner gets back.
A worked example: when buying pays off
We ran one case through our rent vs buy calculator. These are assumptions, not forecasts:
- A $350,000 home with 10% down and a 30-year fixed rate of 6.5%.
- Property tax, insurance and maintenance of 2.5% of the home's value a year (1.1% tax and 1% maintenance from the CFPB worksheet, plus an assumed 0.4% for insurance).
- Closing costs of 3% of the price and selling costs of 6%, both assumptions.
- Rent of $2,000 a month rising 3% a year, home values rising 3% a year, and the renter investing the down payment, closing costs and any monthly savings at 5% a year.
Upfront, the buyer puts in $45,500: $35,000 down and $10,500 of closing costs. After one year, the renter is $29,223 better off, mostly because buying and selling costs have eaten the owner's gains. The gap narrows to $15,318 by year five. Buying pulls ahead in year eight and leads by $68,405 after 15 years.
The example leaves out private mortgage insurance. The CFPB explains that a conventional loan with less than 20% down may require PMI, which is added to your monthly payment until you can have it removed. With 10% down, include your PMI quote as an extra owner cost and the break-even year moves later. So does a home with HOA dues.
The assumptions that flip the answer
Change one input at a time and the break-even year moves a lot:
| Change from the example | Year buying pulls ahead |
|---|---|
| None (the example above) | Year 8 |
| Home values rise 4% a year | Year 5 |
| Home values rise 2% a year | Year 14 |
| Home values rise 1% a year, or not at all | Not within 15 years |
| Rent is $2,400 instead of $2,000 | Year 4 |
| Rent is $1,600 instead of $2,000 | Not within 15 years |
| Mortgage rate is 5.5% instead of 6.5% | Year 5 |
| The renter's investments earn 7% instead of 5% | Year 13 |
| Rent rises 1% a year instead of 3% | Not within 15 years |
Two things stand out. First, rent relative to price is the strongest single signal. A home that rents for little compared with its price is expensive to own and cheap to rent. A quick screen: divide the price by a year's rent for a comparable home. In the example that's about 14.6. With $2,400 of rent it's about 12.2, and buying pulled ahead in year 4. The lower that number, the better buying tends to look. Second, nobody knows future home prices, so treat any break-even year that relies on strong appreciation as optimistic.
When renting wins, and the catch
Renting usually wins in these numbers if you expect to move before your break-even year, which is at least four years away in every case above, if local rents are low compared with prices, or if buying would take every dollar of savings you have. It also keeps you flexible for a job change, which has value the calculator can't price.
Here's the catch that flips the result the other way. Every renter advantage in the table assumes the renter actually invests the down payment and the monthly difference, and keeps doing it for years. If that money gets spent instead, the renter's pot shrinks and buying's forced saving through principal payments looks much better. Be honest with yourself about which renter you'd be. If you wouldn't invest the difference, give more weight to buying, provided you'll stay put.
Buying also carries risks a spreadsheet understates. One large repair can swallow several years of the maintenance budget, and if you have to sell in a falling market, the 6% selling cost comes out of a smaller number.
How to run your own comparison
- Use real local numbers. Take the rent for a comparable home, your county's property tax rate and an insurance quote.
- Price the transaction costs. A Loan Estimate lists your closing costs; our closing costs calculator adds them up into cash to close.
- Run three price paths in the rent vs buy calculator: 0%, 2% and 4% a year. If buying only wins in the 4% case, you're betting on appreciation.
- Compare the break-even year with how long you'll stay. Leave a margin of a few years.
- Check the payment is affordable with the home affordability calculator. A good long-run bet still fails if the monthly payment squeezes your budget.
If your plans are uncertain or the numbers are close, renting for another year costs little and keeps your options open. For a larger decision involving family money or a move, a fee-only financial planner can check your assumptions.
Next 10 minutes: enter your rent and a target price in the calculator. Today: rerun it at 0%, 2% and 4% price growth. This week: get a real Loan Estimate and property tax figure, and decide how many years you'd realistically stay.
Sources
- Consumer Financial Protection Bureau: How can I figure out if I can afford to buy a home and take out a mortgage?
- Consumer Financial Protection Bureau: Buying a house: monthly payment worksheet
- Consumer Financial Protection Bureau: Loan Estimate explainer
