Rent vs. buy: the assumptions that decide the answer

Is it better to rent or buy?

Neither is better in general, and the price and the rent don’t settle it on their own. The answer also turns on how long you stay, how fast the home gains value compared with what your cash would earn, the mortgage rate, what owning costs each year as a share of the home’s value, and the cost of buying and selling.

In the worked example below, renting is ahead by $19,235 after 7 years and buying pulls ahead in year 11. Of the one-at-a-time changes tested, four flip the 7-year answer to buying: 5% appreciation instead of 3%, a 4% investment return instead of 6%, a 5.5% mortgage rate instead of 6.5%, or $2,400 rent instead of $2,200. The useful question is which assumption your answer rests on, and how sure you are of it.

How do you compare renting and buying fairly?

Treat them as two ways of spending the same money over the same years, and compare what each leaves you with. Four rules keep it fair:

1. Same starting cash. The buyer spends the down payment and closing costs; the renter invests the same amount.
2. Same monthly budget. Each month, whichever path costs less invests the difference. Owning costs principal and interest, property tax, homeowners insurance, maintenance, HOA dues and any PMI. Renting costs rent and renters insurance.
3. Net worth at the end. The buyer sells, pays selling costs and the remaining loan, and keeps any investments. The renter keeps the portfolio.
4. No income taxes on either side (see what the comparison leaves out).

After $H$ years:

Here $V_0$ is the purchase price, $a$ the yearly appreciation, $s$ the selling costs as a share of the sale price, $B_H$ the loan balance still owed, and $I_H$ each path’s investments, grown at the investment return.

The down payment is not a cost. It moves from savings into home equity, while the renter’s copy keeps earning a return. What each side gives up for good is interest, property tax, insurance, maintenance and transaction costs for the buyer, and rent and renters insurance for the renter.

Conventions behind the figures: rent, property tax and maintenance change once a year, with tax and maintenance charged on the home’s value at the start of each year. Insurance stays flat. The investment return is an effective annual rate, so 6% a year is $(1.06)^{1/12} - 1 = 0.4868\%$ a month, and each month’s difference is invested at the end of the month.

Worked example: a $400,000 home or $2,200 rent for 7 years

Every input is an example assumption, not a current market figure.

1. Starting cash: $80,000 + $12,000 = $92,000. The buyer spends it; the renter invests it.
2. First-year monthly costs. Owning: $2,022.62 principal and interest on the $320,000 loan, plus $366.67 property tax, $150.00 insurance and $333.33 maintenance, for $2,872.62. Renting: $2,200.00 rent plus $20.00 insurance, for $2,220.00. The renter invests the $652.62 difference each month.
3. The gap narrows. Rent rises 3% a year while principal and interest stay fixed, so in year 7 rent is $2,626.92 a month against about $3,008 for owning. Over the 7 years the renter adds $42,895.57 to the portfolio.
4. Renter after 7 years: the $92,000 grows to $138,333.98 and the monthly additions to $54,001.33, for $192,335.32.
5. Buyer after 7 years: the home is worth $400,000 × 1.03⁷ = $491,949.55. Selling costs take $29,516.97 and the loan balance is $289,331.98, which leaves $173,100.59.
6. Result: $173,100.59 − $192,335.32 = −⁠$19,234.73. Renting is ahead by $19,234.73.

Figures are rounded to the cent from unrounded values, so the parts in steps 4 and 5 can sum to a cent off the total.

Early mortgage payments are mostly interest, which is part of why the buyer trails. Of about $169,900 paid in principal and interest over 7 years, about $139,232 is interest and only $30,668 reduces the loan.

Which assumptions change the answer most?

Per percentage point, property tax, maintenance, appreciation and the mortgage rate move the 7-year result most; the investment return, rent growth and transaction costs move it less. Change one input at a time from the base case and watch two things: who is ahead after 7 years, and the first year-end at which selling would leave the buyer at least as well off as the renter.

The steps differ in size, so compare them per percentage point. Over 7 years, one point is worth about $37,500 for property tax or maintenance, $27,500 to $31,000 for appreciation, about $26,500 for the mortgage rate, $10,600 to $11,800 for the investment return, $6,700 to $7,200 for rent growth, about $6,000 for closing costs and about $4,900 for selling costs. Each $100 of starting monthly rent is worth about $11,200.

Two things explain the ranking:

• What each rate applies to. Appreciation, property tax and maintenance are percentages of a $400,000 house, and the mortgage rate applies to a $320,000 loan. The investment return applies to the renter’s $92,000 plus later additions, so each point moves less money.
• When the money moves. Tax and maintenance are paid monthly from the start, and the renter invests what the buyer spends on them. Appreciation arrives only at the sale, minus selling costs, and a higher value also raises the tax and maintenance bills. So a point of tax or maintenance outweighs a point of appreciation here.

The inputs also differ in how well you can know them. The mortgage rate and closing costs come from lender quotes, the property tax from the local assessor or tax office and the rent from listings. Base the tax on the price you would pay; a seller’s current bill can be lower, since property taxes typically rise with the home’s value. Appreciation, investment return, rent growth and maintenance are guesses, so they are the ones to test at both ends of a plausible range.

How do appreciation and investment return work together?

They pull in opposite directions, so the answer depends on both at once. After 7 years, with every other input as in the base case (the year in parentheses is when buying first comes out ahead):

Read the diagonal: raising both rates by two points does not cancel out. Appreciation works on the whole house, mostly bought with borrowed money, while the return works on a smaller portfolio. So an equal rise in both favors buying, an equal drop favors renting, and borrowing magnifies the buyer’s losses when prices fall (see the questions at the end).

Keep the growth rates on the same footing. The figures are in future dollars, so appreciation, rent growth and the return should all include the same inflation assumption (see nominal vs. real returns). Pairing an inflation-adjusted return with nominal appreciation biases the result toward buying.

How long do you need to stay for buying to pay off?

In the base case, 11 years. Net worth at each year-end, if the home were sold then:

Each amount is rounded to the dollar separately, so a row can be $1 off when you subtract.

The early gap is mostly transaction costs. Buying costs $12,000 up front and selling takes 6% of the sale price: $36,720 in all if you sell after one year, $41,516.97 after seven. That round trip is roughly fixed, so each extra year gives appreciation and loan paydown more time to cover it. A seller or lender credit doesn’t remove closing costs: the CFPB notes they are usually paid back through a higher price, loan amount or rate.

Meanwhile rent keeps rising and principal and interest do not. In year 14 the rent ($3,230.77 a month) passes the owner’s monthly cost ($3,200.59), and from then on the buyer is the one investing the difference.

What return should the renter’s cash earn?

Use the return you would expect after fund fees, before tax, on the investments you would actually hold for that many years. Investor.gov ties a suitable mix to your time horizon and risk tolerance, and a higher expected return comes with a chance of losing money. A house carries risk too, so no choice is neutral.

The comparison also assumes the renter invests every dollar of the monthly difference. If some of it would be spent, the renter’s result is overstated. The buyer’s principal payments, $30,668 over 7 years in the example, are saving that happens automatically.

What does the price-to-rent ratio tell you?

It divides the home’s price by a year’s rent for a comparable home: $400,000 ÷ ($2,200 × 12) = 15.2 in the example. A lower ratio means rent is high relative to price, which leans toward buying; a higher one leans toward renting. It is a quick screen for comparing homes or neighborhoods, but it ignores the mortgage rate, property tax, maintenance, transaction costs, how long you stay and appreciation.

The example shows the limit: at 15.2, renting still wins over 7 years. Rent of $2,400 (a ratio of 13.9) tips it to buying, but so does a mortgage rate one point lower at the same 15.2.

What the comparison leaves out

• Income taxes. Mortgage interest is deductible only if you itemize on Schedule A (IRS Publication 936). Excluding gain on a main home, up to a limit, generally requires owning and living in it for at least 24 months of the 5 years before the sale; shorter stays get a partial exclusion only in specific cases such as a work- or health-related move (IRS Publication 523). The renter’s investment gains can be taxed as capital gains when sold (IRS Topic 409). Leaving taxes out therefore tends to flatter renting, especially for people who itemize and stay long enough to qualify for the exclusion.
• Smooth prices. Appreciation is a steady yearly rate here; real prices move unevenly and can fall. The FHFA House Price Index has history by state, metro area, county and ZIP code, but past growth is not a forecast.
• Concentration. With 20% down, a 10% price drop wipes out $40,000, half the down payment, before selling costs. The renter’s portfolio can be spread across many investments.
• Lumpy repairs. Maintenance is spread evenly; a roof or furnace arrives as one bill.
• Costs held flat. Insurance, HOA dues and renters insurance don’t rise, and rent grows at one rate throughout. The BLS CPI rent index shows how rents have moved in the U.S., its regions and selected metro areas.
• Moving, flexibility and PMI. Moving costs, the ease of relocating as a renter and the control that comes with owning are not in the numbers. With less than 20% down, add PMI for as long as it applies.

Try it

• Rent vs. buy calculator: enter home price 400,000, monthly rent 2,200, down payment 20%, mortgage rate 6.5%, 7 years you plan to stay, property tax 1.1%, maintenance 1%, homeowners insurance 1,800 a year, HOA dues 0, closing costs 3%, selling costs 6%, loan term 30 years, PMI rate blank (no PMI), rent increase 3%, renters insurance 240 a year, home appreciation 3% and investment return 6%. Renting should come out ahead by $19,234.73 (renter $192,335.32, buyer $173,100.59), with buying first ahead in year 11. Then change one input at a time, as in the sensitivity table.
• Mortgage calculator: home price 400,000, down payment 20%, loan term 30 years, interest rate 6.5%, property tax per year 1.1% of the home price, insurance per year 1,800, HOA dues 0 and PMI set to None give $2,022.62 principal and interest, plus $366.67 property tax and $150.00 insurance: $2,539.29 a month. Maintenance is extra.
• Compound interest calculator: initial deposit 92,000, regular contribution 0, annual interest rate 6%, compounding Annually and 7 years give $138,333.98, the renter’s starting cash in step 4.
• Home affordability calculator: check whether a payment like this fits your income and debts before comparing paths.