Rent vs. Buy: The 5% Rule and Where It Breaks

There is a one-line shortcut people reach for when they are trying to decide whether to rent or buy: the 5% rule. It is quick, it fits on a napkin, and it is right often enough to be useful. It is also wrong often enough to be dangerous if you lean on it too hard.

This guide shows you exactly how the rule works, the arithmetic behind it, and the four places it breaks down — so you know when to trust it and when to run the full numbers instead.

What the 5% rule actually says

The 5% rule estimates the annual, unrecoverable cost of owning a home as 5% of its value. Divide that by twelve and you get a monthly figure. Compare that figure to the rent on a similar place. If rent is lower, renting is likely the better deal. If rent is higher, buying may come out ahead.

The 5% is not one number — it is three costs stacked together:

• Property tax — roughly 1% of the home’s value each year. This varies a lot by location, but 1% is a common national placeholder.
• Maintenance — roughly 1% a year. Roofs, water heaters, paint, and the hundred small repairs a landlord would otherwise cover.
• Cost of capital — roughly 3%. This is the return you give up on the money tied up in the home instead of invested elsewhere. It is the part people forget, and it is the largest slice.

Add them: 1% + 1% + 3% = 5%. None of that money comes back to you. It is the true cost of holding the home, separate from the mortgage principal you are slowly banking as equity.

The arithmetic, worked out

Say you are looking at a home worth $400,000.

So the rule says: if you can rent a comparable place for less than about $1,667 a month, renting probably wins. If comparable rent runs $2,200, buying likely comes out ahead over time.

That is the whole rule. Multiply the home value by 5%, divide by twelve, and compare to rent. It gives you a fast read on which direction the decision leans — before you spend an afternoon on a full year-by-year comparison.

Where the 5% rule breaks

The rule earns its keep as a gut-check. But it papers over four things that can flip the answer entirely.

1. It assumes a 3% cost of capital

The 3% cost-of-capital slice is a guess. If the money you would sink into a down payment could earn 7% invested in the market, your true cost of capital is higher than 3%, and the rule understates the cost of owning. If you would otherwise leave that cash in a low-yield savings account, your cost of capital is lower, and the rule overstates it. The single assumption that carries the most weight in the rule is the one it hides. The opportunity-cost math is worth understanding on its own.

2. It ignores how long you will stay

The 5% rule is a snapshot. It compares one month of renting to one month of owning and stops there. But buying front-loads enormous one-time costs — the down payment, closing costs, and eventually the cost to sell. Those only pay off if you stay long enough. The rule says nothing about your time horizon, which is often the deciding factor. If you are moving in two years, buying can lose badly even when the 5% math says buy. The question of how long you have to stay to justify buying is its own calculation.

3. It ignores appreciation and rent growth

The rule treats both numbers as frozen. In reality, the home may appreciate, which offsets some of the owning cost, and rent tends to rise year after year, which quietly makes renting more expensive over time. A place that looks like a clear rent in year one can flip to a clear buy by year seven once rent has climbed and the home has gained value. A static rule cannot see that crossover.

4. Property tax and maintenance are not always 1%

The 1% placeholders are national averages. In some areas property tax runs well above 2%; in others it is a fraction of a percent. Maintenance on an older home, or one with a pool or a large yard, can far exceed 1%. When your real numbers diverge from the placeholders, the 5% total is no longer 5%, and the rule’s answer drifts.

How to use the rule the right way

Treat the 5% rule as a first read, not a verdict. It is genuinely useful for one thing: telling you, in ten seconds, roughly which direction a decision leans so you know whether it is even worth a deeper look. If renting is dramatically cheaper or dramatically more expensive than the 5% figure, the rule is probably right and you can move on.

But when the two numbers are close — within a few hundred dollars a month — the rule cannot resolve it. That is exactly when the four breakdowns above start to matter, and you need a full comparison that accounts for your time horizon, your real tax and maintenance rates, appreciation, rent growth, and the true opportunity cost of your down payment.

That is what the Rent vs. Buy Calculator does. It runs both paths year by year and shows you the break-even year — the point where owning finally becomes cheaper than renting — instead of a single frozen month.

Frequently asked questions

What is the 5% rule for renting vs. buying?

It is a shortcut that estimates the yearly unrecoverable cost of owning as 5% of the home’s value — roughly 1% property tax, 1% maintenance, and 3% cost of capital. Divide that by twelve and compare it to monthly rent for a similar place. If rent is lower, renting likely wins; if rent is higher, buying may. It is a fast gut-check, not a full analysis.

Is the 5% rule accurate?

It is a reasonable first approximation, but it rests on assumptions that may not fit your situation — a fixed 3% cost of capital, 1% tax and maintenance, and no time horizon, appreciation, or rent growth. When your real numbers differ, so does the answer. Use it to see which way a decision leans, then confirm with a full year-by-year comparison.

When does the 5% rule give the wrong answer?

Most often when the two numbers are close, when your cost of capital is far from 3%, when you will not stay long enough to recover the up-front buying costs, or when local property taxes or maintenance run well above 1%. In those cases the rule can point the wrong way, and only a full comparison settles it.

Not financial advice. The figures above are illustrative examples, not current market rates or tax figures, and every number depends on your local market, taxes, and how long you stay. Confirm with a lender, a tax professional, and a real estate agent before deciding.