“Rent is dead money” is one of the most repeated lines in personal finance. It is also only half true. Owning a home comes with its own dead money: interest, taxes, maintenance and the returns your deposit could have earned elsewhere. The real question is not whether renting has costs, but whether renting or owning costs less for the same home, over the time you plan to stay.
This guide gives you a framework for answering that, a quick rule of thumb, and a full 10-year comparison with every assumption on the table. You can run your own version in the rent vs buy calculator.
Why “rent is dead money” is only half the story
When you rent, almost everything you pay is gone: you get a place to live, and nothing else. When you own, your mortgage payment splits in two. The principal part is not a cost at all. It is savings, moved from your bank account into your home equity. The interest part is gone, just like rent.
On top of interest, owners pay costs renters don’t: property tax or council rates, building insurance, maintenance and repairs, and large one-off costs when buying and selling. Owners also tie up a deposit that could otherwise be invested.
So a fair comparison puts the renter’s rent against the owner’s unrecoverable costs, the money that does not come back as equity.
The unrecoverable costs framework
For an owner, unrecoverable costs each year are roughly:
- Mortgage interest, not the principal.
- Property tax (or council rates), building insurance and strata or HOA fees.
- Maintenance, often budgeted at about 1% of the home’s value a year, though older homes can cost more.
- Opportunity cost: the return your deposit would have earned if you had invested it instead.
Against those, owners expect a gain renters don’t get: price growth. Netting the expected growth off the costs gives the fairest annual comparison with rent.
Here is year one for a $500,000 home bought with a $100,000 deposit and a $400,000 mortgage at an assumed 6%:
| Owner’s cost, year one | Amount |
|---|---|
| Mortgage interest | $23,866 |
| Property tax (1% of value) | $5,000 |
| Maintenance (1% of value) | $5,000 |
| Insurance | $1,500 |
| Opportunity cost of the $100,000 deposit at 6% | $6,000 |
| Total unrecoverable cost | $41,366 |
| Less expected price growth (3%) | −$15,000 |
| Net annual cost of owning | $26,366, or about $2,197 a month |
If a comparable home rents for $2,200 a month ($26,400 a year), the two options cost almost exactly the same in year one. That makes this a useful example, because it shows what tips the balance when annual costs are level.
Note the mortgage split. In year one, $23,866 of the $28,778 in mortgage payments is interest. That share falls over time as the balance shrinks. Our guide to how mortgage amortization works explains why.
The 5% rule
The 5% rule, popularized by Canadian portfolio manager Ben Felix, is a shortcut version of the same framework. It estimates the annual unrecoverable cost of owning as 5% of the home’s value:
- about 1% for property tax,
- about 1% for maintenance, and
- about 3% for the cost of capital: the mortgage interest and the return your deposit could have earned, after allowing for the growth you expect from the home.
Break-even monthly rent ≈ home value × 5% ÷ 12If you can rent a comparable home for less than this, renting is likely to be financially competitive. If rent is higher, buying looks better.
For the $500,000 home, that is $25,000 a year, or about $2,083 a month. Adding the $1,500 of insurance from our example brings it to about $2,208.
Treat the 5% as a starting point, not a constant. Local property taxes vary widely, so swap in your real figure. Higher mortgage rates or higher expected investment returns raise the cost of capital above 3%; lower ones reduce it. In the UK, council tax is usually paid by whoever lives in the home, renter or owner, so leave it out of the comparison. The rule also ignores the one-off costs of buying and selling, which is where your time horizon comes in.
Transaction costs and your time horizon
Buying and selling a home is expensive. Depending on where you live, you may pay closing costs or stamp duty when you buy, and agent fees and legal costs when you sell. In our example, buying costs are $15,000 and selling costs after 10 years are about $40,300.
These are one-off hits. If owning is cheaper than renting each year, a longer stay gives those annual savings time to repay them. If owning costs about the same as renting, as in our example, there is nothing to repay them with, and the renter stays ahead.
One way to see this is the rent at which buying breaks even, for different lengths of stay, using the assumptions in the next section:
| How long you stay | Starting rent at which buying breaks even |
|---|---|
| 3 years | about $3,490 a month |
| 5 years | about $2,980 a month |
| 10 years | about $2,600 a month |
| 20 years | about $2,400 a month |
The shorter your stay, the higher rent needs to be before buying wins. If you might move for work within a few years, that matters more than almost any other input.
A worked 10-year comparison
Here are the full assumptions. They are illustrative, not a forecast, and taxes are ignored.
| Assumption | Value |
|---|---|
| Home price | $500,000 |
| Deposit | 20% ($100,000) |
| Buying costs | 3% ($15,000) |
| Mortgage | $400,000, 30-year fixed at 6% ($2,398.20 a month) |
| Property tax and maintenance | 1% of value each, every year |
| Home insurance | $1,500 in year one, rising 3% a year |
| Home price growth | 3% a year |
| Selling costs | 6% of the sale price |
| Rent for a comparable home | $2,200 a month, rising 3% a year |
| Investment return | 6% a year |
Both households have the same budget. The renter invests the $115,000 the buyer spent upfront, and each month invests the difference between the owner’s costs and the rent. In year one, the owner pays $3,356.54 a month in mortgage, tax, maintenance and insurance, so the renter invests $1,156.54 a month.
Results after 10 years
Buyer. The home is worth $671,958. The mortgage balance is $334,743 and selling costs are $40,317, leaving $296,898 of net equity.
Renter. The investment portfolio, built from the $115,000 plus monthly contributions, is worth $369,646.
Difference: the renter is ahead by about $72,700.
Over the 10 years, the renter paid $302,646 in rent. The owner paid $421,187 in mortgage payments, tax, maintenance and insurance, but $65,257 of that was principal, which came back as equity.
Why does the renter come out ahead when annual costs started level? Mainly transaction costs. The $15,000 spent buying would have grown in the renter’s portfolio, and the owner loses about $40,300 when selling. Together they explain most of the gap.
What changes the answer
Small changes in assumptions swing the result a long way. Here is the buyer’s position minus the renter’s after 10 years, with everything else unchanged:
| Home price growth | Investment return 4% | 6% | 8% |
|---|---|---|---|
| 1% a year | Renter ahead $120,035 | Renter ahead $171,733 | Renter ahead $232,036 |
| 3% a year | Renter ahead $20,195 | Renter ahead $72,749 | Renter ahead $133,977 |
| 5% a year | Buyer ahead $99,669 | Buyer ahead $46,194 | Renter ahead $16,029 |
The mortgage rate matters just as much. Keeping all other assumptions as stated, a 4% mortgage puts the buyer ahead by about $26,200, while a 7% mortgage puts the renter ahead by about $124,000. Whether that rate is fixed also changes the risk you carry; see fixed vs variable rates.
Three other factors this simple model leaves out:
- Taxes. Many countries give a main home favorable tax treatment when you sell, such as the US capital gains exclusion or Australia’s main residence exemption, while a renter’s investments may be taxed unless they sit in a tax-advantaged account. That usually tilts the comparison toward buying.
- Behavior. The renter only wins if they actually invest the difference, every month, for 10 years. Many people don’t. A mortgage forces saving through principal repayments.
- Rent growth. If rents rise faster than 3%, buying improves. A fixed-rate mortgage locks in your largest housing cost, while rent can rise every year.
Investment returns compound, which is why the renter’s portfolio grows so much from a head start. The guide to compound interest explains the mechanics.
The non-financial side
Money is only part of the decision. Things the numbers can’t capture:
- Stability and control. Owners can renovate, keep pets and avoid being asked to move when a landlord sells. How much this matters depends on local tenancy laws, which give renters more security in some places than others.
- Flexibility. Renters can move for a job, a relationship or a better area with a few weeks’ notice and no selling costs.
- Responsibility. Owners handle every repair, and big ones arrive without warning. Renters call the landlord.
- Risk. A home is a large, leveraged bet on one property in one area. That can work brilliantly or badly. Renters with a diversified portfolio carry different risks.
- Life stage. School zones, a growing family or plans to stay in one community for decades can tip the balance toward buying, whatever a spreadsheet says.
How to run your own numbers
- Find the real rent for a home comparable to the one you would buy, not a smaller apartment.
- Apply the 5% rule with your local property tax and a realistic cost of capital as a first check.
- Estimate how long you will stay. Be honest; plans change.
- Run the full comparison in the rent vs buy calculator, then try pessimistic and optimistic price growth.
- Check the purchase is affordable with the affordability calculator and the mortgage calculator, and see how much deposit you need to get started.
If buying and renting come out close for you, let the non-financial factors decide. Neither choice is a mistake when you understand what each one really costs.
This guide is general information, not personal financial advice. Rules and products vary by country and lender.