Rent vs Buy Calculator

The "renting is throwing money away" narrative is one of the most pervasive myths in personal finance. In reality, both renting and buying involve unrecoverable costs. The mathematically correct way to make this decision is to compare the unrecoverable costs of renting with the unrecoverable costs of homeownership, while rigorously accounting for the opportunity cost of your capital.

• The Unrecoverable Costs of Homeownership: A mortgage payment is not "going into your savings account." In the early years of a 30-year mortgage, the vast majority of your payment goes entirely toward interest (an unrecoverable cost). You must also add property taxes, HOA fees, insurance, and maintenance (typically 1% of home value annually). These are all unrecoverable.
• The "5% Rule" Rule of Thumb: A quick mental model to compare renting vs. buying is the 5% rule. Multiply the value of the home by 5% and divide by 12. This estimates your monthly unrecoverable homeownership costs (1% property tax + 1% maintenance + 3% cost of capital). If you can rent a comparable home for less than this number, renting is generally the better financial decision.
• The Opportunity Cost of Down Payments: When you buy a home with 20% down, you lock a large amount of cash in dry equity. If you rent, that cash can be invested in an index fund tracking the S&P 500 (historically returning 7-10% annually). The compound growth of that invested capital often outpaces the equity aggressively being built in a home, especially after adjusting for inflation.
• Leverage and Risk: A primary home is a highly leveraged asset. Putting 20% down implies 5-to-1 leverage. If the home appreciates by 5%, your actual cash-on-cash return on the down payment is much higher. Conversely, if the market corrects by 10%, half of your equity is instantly wiped out.
• Transaction Friction: Real estate is profoundly illiquid. Closing costs to buy (2-5%) and agent commissions to sell (5-6%) mean that on day one of homeownership, your net worth actually drops. You typically must stay in a home for 5 to 7 years just to break even on the transaction friction alone.

Ultimately, renting provides ultimate liquidity and a fixed maximum monthly cost. Homeownership acts as a forced savings mechanism with the benefit of tax-free capital gains (for primary residences), but it represents your minimum monthly cost. Use the calculator above to manipulate your expected investment returns to see exactly at what point renting mathematically dominates buying.