Rent vs Buy: How to Run the Numbers

Why the simple comparison is wrong

The common mistake is comparing the monthly mortgage payment to the monthly rent. This is misleading in both directions. Buying has costs beyond the mortgage: property taxes (typically 1-2% of home value per year), homeowner insurance (0.5-1%), and maintenance (0.5-1.5%). Together, these often add 30-50% to the mortgage payment.

On the other side, renting has a hidden cost too: the opportunity cost of the down payment. If you invest the down payment instead of buying, those funds can compound over time. On a 100,000 down payment at 7% annual return over 10 years, that is roughly 96,000 in investment returns foregone.

The four components of the comparison

1. Total cost of buying: cumulative mortgage payments + property taxes + insurance + maintenance + buying closing costs.
2. Equity built: home value growth minus remaining loan balance. This is the main financial benefit of buying.
3. Total cost of renting: cumulative rent payments over the period.
4. Opportunity cost of the down payment: what the down payment would have grown to if invested instead.

Net cost of buying = total buying costs minus equity built. Net cost of renting = total rent paid minus the investment return on the down payment (the renter who invests the deposit can build wealth this way). The break-even year is when net buying cost falls below net renting cost.

Worked example: 400,000 home, 7% mortgage, 20% down

Home price: 400,000. Down payment: 20% (80,000). Loan: 320,000 at 7% for 30 years. Monthly mortgage payment: 2,129. Monthly taxes (1.2%): 400. Monthly insurance (0.5%): 167. Monthly maintenance (1%): 333. Total monthly buying cost: 3,029.

Renting equivalent: 2,500/month. Home appreciation: 3% per year. Investment return on down payment: 7% per year.

At 10 years: equity built (home worth ~537,000, loan balance ~268,000) = 269,000. Total buying costs over 10 years = ~363,000 (including 10,000 closing costs). Net buying cost = 363,000 - 269,000 = 94,000.

Total rent over 10 years = 300,000. Investment return on 80,000 down payment at 7% for 10 years = 77,000. Net renting cost = 300,000 - 77,000 = 223,000.

In this example, buying is clearly cheaper at 10 years (net cost 94,000 vs 223,000). But the result depends heavily on the assumptions - particularly the appreciation rate and investment return rate.

When renting wins

Renting often wins when: the comparison period is short (buying transaction costs are 5-8% of the home price and take years to recover); the rental equivalent is much cheaper than the ownership costs; the local property market has low or negative appreciation; or the renter is disciplined enough to actually invest the down payment.

In high-cost cities where rent is 0.3-0.4% of home value per month (the price-to-rent ratio is 250-300+), buying requires many years before it outperforms renting on a net cost basis. In lower-cost markets where rent-to-price ratios are higher, buying breaks even much sooner.

Common mistakes in the rent vs buy analysis

• Forgetting the opportunity cost of the down payment - this is the biggest gap in most comparisons.
• Not including property taxes and maintenance in the buying cost - they can add 1,000+ per month on a 500,000 home.
• Assuming the renter does not invest the down payment - if the renter just spends the extra cash, buying looks better than it is.
• Using the mortgage payment rather than PITI (principal, interest, taxes, insurance) as the monthly buying cost.
• Not accounting for buying and selling costs - 5-8% of the purchase price is lost to transaction costs; this takes years to recover through appreciation.

Use the Rent vs Buy Calculator

The Rent vs Buy Calculator does this analysis automatically. Enter the home price, your mortgage terms, current rent, home appreciation rate, and investment return assumption. It runs a year-by-year simulation and shows the break-even year, total net cost of buying, total net cost of renting, equity built, and opportunity cost of the down payment - for any comparison period from 5 to 30 years.

Frequently asked questions

What appreciation rate should I assume?

The US national average home appreciation has been roughly 3-4% per year over the long run. High-demand cities have seen higher rates; many suburban and rural markets are closer to 2-3%. Using historical data from your local market is more reliable than the national average. Your local real estate agent or county assessor can provide area-specific data.

Does the mortgage interest tax deduction change the analysis?

Potentially yes, but less than many people assume. In the US, only about 14% of taxpayers itemise deductions, which is required to claim the mortgage interest deduction. Even for those who do, the benefit is the difference between itemised deductions and the standard deduction - not the full deduction amount. Consult a tax adviser to understand your specific situation.