Rent or buy a home? How to compare the real costs

Compare the true costs of renting and owning with the 5% rule and price-to-rent ratio, and see how long you need to stay.

Buying a home is often called the smart move, and renting “throwing money away”. The truth is more balanced: both have costs you never get back. The right choice depends on prices where you live, how long you will stay, and what you would do with the money otherwise. Costs you never get back When you rent, your unrecoverable cost is the rent. When you own, it is not the whole mortgage payment, because the principal part builds equity. The costs owners never get back are: The 5% rule A quick way to compare: the unrecoverable costs of owning are roughly 5% of the home’s value a year — about 1% property tax, 1% maintenance, and 3% for the cost of money (mortgage interest and the return given up on your down payment). Multiply the home price by 5% and divide by 12. If you can rent a similar home for less than that each month, renting may be cheaper. If rent is higher, buying may come out ahead. Adjust the percentages for your area’s tax and mortgage rates. The price-to-rent ratio Divide the home price by a year of rent for a similar home. A $360,000 home that would rent for $1,800 a month has a ratio of $360,000 ÷ $21,600 = 16.7. As a rough guide, under 15 tends to favor buying, 15 to …