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Rent or Buy? The 5% Rule for a Quick First Answer

By Smart Budget Sheets November 10, 2026
The 5% rule for a quick rent-vs-buy comparison.

Comparing a monthly rent with a monthly mortgage payment is misleading: a big part of the mortgage payment is principal (savings), and owning has costs a renter never sees. The 5% rule is a quick way to compare like with like.

The rule

Estimate the unrecoverable cost of owning as about 5% of the home’s value a year:

  • ~1% property tax (varies a lot by area),
  • ~1% maintenance,
  • ~3% cost of capital: mortgage interest plus the return your down payment could have earned elsewhere.

Example

Home price $400,000. 5% = $20,000 a year, about $1,667 a month.

  • If a comparable home rents for less than about $1,667, renting is likely cheaper in pure cost terms.
  • If rent is well above that, buying likely wins, assuming you stay long enough.

Adjust it for your situation

  • Higher mortgage rates raise the 3% part. At 7% interest and an expected 5% investment return, 4% may be more realistic, making the threshold closer to 6%.
  • High property tax areas can add another 1%.
  • Buying and selling costs (often 6% to 10% combined) mean owning usually needs at least 5 years to pay off.

Beyond the math

Owning gives stability and control; renting gives flexibility and no surprise repair bills. The rule only tells you which is cheaper, so treat it as a starting point and then run a full rent-vs-buy comparison with your own numbers.

Free tools

General information, not financial advice. Figures are rounded examples.

#personalfinance #budgeting #housing
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