The 5% rule for rent vs. buy
One line of arithmetic turns a home price into a breakeven rent. Then the full calculator handles everything the rule leaves out.
The rule in one line
Owning a home carries unrecoverable costs — money you pay and never get back — of roughly 5% of the home’s value per year: about 1% property tax, 1% maintenance, and 3% cost of capital (the return your down payment could have earned, plus the real cost of mortgage interest). Renting’s unrecoverable cost is simply the rent. So the breakeven is one line:
Breakeven annual rent ≈ home price × 5%
If market rent is below 5% of the purchase price, renting is likely cheaper on pure cost; above it, buying likely wins. The rule was popularized by Ben Felix of PWL Capital as a quick filter before doing the full math.
A $500,000 home × 5% = $25,000 a year, or about $2,083 a month. If comparable rentals cost $1,800, renting wins by roughly $280 a month in unrecoverable costs — before any price appreciation. If rentals cost $2,400, buying wins by about $320 a month. One multiplication, and you know which side of the fence you are on.
What the rule leaves out
The 5% rule deliberately ignores four things that can flip the answer: home price appreciation (ownership builds equity if prices rise), rent growth (rents compound; a mortgage payment does not), transaction costs (buying and selling costs run several percent each way — they punish short stays), and taxes and leverage details (mortgage interest deductibility, local tax rates, and your actual down payment). It also treats the 3% cost of capital as fixed; in a high-rate environment the true number is higher.
Adjusting the rule for your market
The 5% is a national average, not a local truth. Three adjustments matter most. Property taxes: in high-tax states (New Jersey, Illinois, Texas) the tax slice alone can be 2%+, pushing your local rule toward 6%; in low-tax states (Hawaii, Alabama, Colorado) it may sit near 4%. HOAs and insurance: a $400 monthly HOA is $4,800 a year of unrecoverable cost — on a $400,000 condo that adds 1.2 points by itself. Rent regulation: in rent-controlled markets, current rent understates future rent growth, which favors buying more than the rule suggests. The practical move: replace each 1% slice with your local number, recompute, and only then compare. If your adjusted rule lands at 6.5% and market rent sits at 5%, the “obvious” national answer was wrong for your zip code.
When the rule is enough — and when it isn’t
The rule is enough for a first-pass filter: if the 5% test says renting wins by a wide margin, you rarely need a spreadsheet to confirm it. Run the full rent-vs-buy calculator when the answer is close, when you plan to stay less than five years (transaction costs dominate), or when local inputs differ a lot from the defaults — high property-tax states, HOA fees, or rent-controlled markets all bend the rule. Think of 5% as the smell test and the calculator as the lab work.
Never buy because “rent is throwing money away.” Interest, tax, maintenance and transaction costs are thrown away too — run the unrecoverable-cost comparison first, then decide with the full picture.