The Rent vs Buy 5% Rule: A Ten-Second Sanity Check Before You House-Hunt

Every rent-versus-buy calculator wants thirty inputs: your tax bracket, expected appreciation, maintenance schedule, HOA dues. The 5% rule asks for one: the home’s price. It won’t replace the full calculator, but it tells you in ten seconds whether buying even deserves your afternoon. Plenty of house hunts should honestly end right there, wallet safely still in pocket.

What the 5% rule says

The annual unrecoverable costs of owning a home run about 5% of its value, split three ways:

• ~1% property tax. This varies a lot by state (under 0.5% in some, near 2% in others), so 1% is a national-ish average, not a promise.
• ~1% maintenance. Roofs, furnaces, plumbing. Averages hide the truth that it arrives in $9,000 surprises.
• ~3% cost of capital. Mortgage interest plus the opportunity cost of your down payment, which could otherwise be invested.

Add it up: 5% of the purchase price vanishes every year whether the home appreciates or not. The principal you pay down comes back to you when you sell; these costs don’t.

The ten-second version

Multiply the home price by 5%, divide by 12. If you can rent a comparable place for less, renting plus investing the difference usually wins. If rent costs more than that number, buying usually wins.

Example: a $400,000 home carries about $20,000 a year in unrecoverable costs, which is $1,667 a month. A similar rental at $1,400 a month? Renting probably comes out ahead. The same rental at $2,100? Buying likely wins over time. One multiplication, and you have your answer before you tour anything. Handy shortcut: every $100,000 of home price works out to about $417 a month in equivalent rent.

What the rule politely leaves out

Transaction costs. Buying costs a few percent in closing costs; selling costs roughly 6% in agent fees. That $26,000-ish round trip on a $400,000 home needs years to amortize, which is where the old rule of thumb comes from: if you’ll move within about five years, rent almost always wins.

Your local tax reality. Property tax is baked into the 5% at 1%, but if your state’s effective rate is 1.8%, your personal rule is really a 5.8% rule. Adjust the first dial and rerun the mental math.

Rent rises, mortgages don’t (mostly). The 5% rule compares today’s rent to today’s ownership cost. Rents tend to climb; a fixed mortgage payment doesn’t. A house that looks borderline today often looks better in year eight.

HOA dues. They aren’t in the 5% at all. A $400-a-month HOA fee is $4,800 a year of pure unrecoverable cost stacked on top of everything else. In condo-heavy buildings, run the rule with your actual dues added in.

Appreciation isn’t counted. The rule ignores home price growth entirely. That’s actually a feature, not a bug: buying because the numbers work beats buying because you assume 5% appreciation forever.

The rule at other price points

It scales with the house. A $250,000 home carries a $1,042-a-month threshold ($250,000 × 5% ÷ 12): comparable rent below that favors renting, above it favors buying. At $750,000, the line is $3,125 a month. Notice what that means for expensive coastal markets. Rents there are high, yet prices are often so high that the 5% line sits above the rent anyway, and the rule quietly sides with renting. That’s not the rule being anti-homeownership. It’s the math saying those prices only pencil out if you stay a long time and prices behave.

When buying still wins, even past the line

The rule is a filter, not a verdict. It can say buying is marginal and you buy anyway: you plan to stay fifteen years, your job is anchored, you want to paint the walls and own a dog without asking a landlord. People buy for reasons that aren’t in a spreadsheet, and that’s fine, as long as you’ve seen the spreadsheet first.

If the rule says it’s close, that’s when the full version earns its keep. The rent vs buy calculator lets you plug in your actual tax rate, closing costs, expected stay, and rent growth to get the detailed answer the ten-second version only approximates.

And whatever the renting side of the ledger frees up, don’t let it evaporate: the difference you’re not spending on the house should go somewhere, and our compound interest calculator shows what invested rent savings become over a decade or two.

Before you book a single viewing, try the full calculation: run your numbers through the rent vs buy calculator and find your honest break-even year.