Rent vs. buy: why the answer depends on how long you stay

“Rent is throwing money away” is half true. Rent buys nothing you keep, but owning has its own money that never comes back: interest, property tax, insurance, upkeep, and the fees to buy and sell. The real question is which pile is bigger, and the answer changes with how long you stay.

A fair comparison

Compare two households that start with the same savings. The buyer spends theirs on the down payment and closing costs. The renter invests the same amount. Each month, whichever choice costs less invests the difference. At the end, the buyer sells the home, pays the selling costs and the loan off, and the two piles of wealth are compared.

This is fairer than comparing rent with the mortgage payment, because it counts what the renter’s money could have earned, and every cost of owning, not only the loan.

The example

Take a $400,000 home, or renting a similar one for $2,200 a month. The buyer puts 20% down at a 6.5% rate over 30 years, pays 3% to buy and will pay 6% to sell, with property tax at 1.1%, $1,800 a year of insurance and 1% a year of upkeep. The home’s price and the rent both grow 3% a year, and invested money earns 6%.

In the first month, owning costs about $2,873 all-in against $2,200 of rent. After three years, renting is ahead by about $32,700, mostly because buying and selling costs have not been earned back. After ten years, renting is still ahead by about $14,900. Buying pulls ahead in year 14, and after 15 years it leads by about $10,700.

The price-to-rent ratio

The quickest screen is the price-to-rent ratio: the home’s price divided by a year’s rent for a similar home. In the example, $400,000 ÷ $26,400 gives about 15. A rule of thumb from the US property site Trulia, still widely quoted, says buying tends to win at a ratio of 15 or less, renting usually wins from 16 to 20, and renting clearly wins above 20. It is a rough screen: it leaves out your rate, your costs and how long you stay.

The example shows how strongly the ratio matters. Change only the rent: at $2,800 a month (a ratio of about 12), buying pulls ahead in year 4 and leads by about $96,000 after ten years. At $1,600 (a ratio of about 21), renting leads by about $126,000 after ten years and buying does not catch up within 40.

What else tips the balance

How long you stay. Buying and selling costs are paid once, so they weigh heavily over a few years and fade over many. If you might move within five years, renting usually wins.

Home price growth. In the example, growth of 5% a year makes buying win from year 4; growth of 1% pushes the break-even out to year 30. Prices rise over long periods on average, but not everywhere, and not every decade.

The return on the renter’s money. Renting only wins if the savings are actually invested. Money left in a current account makes buying look better, because the house is the only thing growing.

The mortgage rate. A higher rate raises the cost of owning without raising the home’s value, and pushes the break-even later.

What the numbers leave out

Taxes can shift the answer either way: mortgage interest relief, capital gains exemptions on a main home, and tax on the renter’s investment returns all depend on where you live. So do the things no calculator prices, such as the freedom to move, the stability of a home you control, or the stress of a large repair.

Test your own case with the rent vs. buy calculator, and check what price your income supports with the home affordability calculator or in the 28/36 rule: how much house can you afford?