The 5% Rule for Rent vs Buy Explained

The 5% Rule is a quick way to estimate whether renting or buying is cheaper, without running a full calculation. Here's how it works.

The Rule

Multiply the home price by 5%, then divide by 12. If rent is cheaper than this number, renting wins financially.

Formula: (Home Price × 5%) ÷ 12 = Break-even monthly rent

Example:

• Home price: $400,000
• $400,000 × 5% = $20,000/year
• $20,000 ÷ 12 = $1,667/month

If you can rent a comparable place for less than $1,667/month, renting is likely cheaper.

Why 5%?

The 5% represents the "unrecoverable costs" of homeownership:

• Property taxes: ~1% of home value annually
• Maintenance: ~1% of home value annually
• Cost of capital: ~3% (opportunity cost of down payment + mortgage interest after tax benefits)

These costs don't build equity — they're gone forever, just like rent.

When to Adjust the 5%

Use 4% when:

• Property taxes are very low (under 0.7%)
• You're in a state with no income tax (better mortgage interest deduction value)
• Interest rates are very low

Use 6% when:

• Property taxes are high (over 1.5%)
• Insurance is expensive (Florida, coastal areas)
• HOA fees are significant
• Interest rates are high

Examples Across Cities

Limitations

The 5% Rule is a starting point, not a final answer. It doesn't account for:

• How long you'll stay (critical factor)
• Local appreciation rates
• Your specific tax situation
• Transaction costs when selling

For a complete analysis, use our rent vs buy calculator which models all these factors month by month.

Quick Mental Math

Can't remember 5%? Just take 0.5% of the home price — that's your monthly break-even rent.

• $300,000 home → $1,500/month break-even
• $500,000 home → $2,500/month break-even
• $1,000,000 home → $5,000/month break-even

If rent is significantly below these numbers, you're probably better off renting.

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Ready to run your numbers? Use our rent vs. buy calculator to see exactly when buying beats renting for your specific situation. For a deeper dive, check out our complete guide to rent vs buy.