The 5% rule is a quick mental shortcut for the rent-vs-buy decision. It estimates the annual unrecoverable cost of homeownership as approximately 5% of the purchase price: 1% for property tax, 1% for maintenance, and 3% for the cost of capital (either mortgage interest or the opportunity cost of equity). If you can rent a comparable home for less than 5% of its purchase price annually, the rule says renting wins on cost.
On a $500,000 home, 5% is $25,000 per year — or $2,083 per month. The default inputs above show $2,100 per month in rent, right at the threshold. The calculator gives the full picture: it models how long you stay, rent growth, home appreciation, and what the invested down payment earns.
Here is how to use the 5% rule, when it works, and where to go when you need a more precise answer.
The three components of the 5%
Property tax accounts for roughly 1% in a typical U.S. market (ranging from 0.3% in Hawaii to 2.2% or more in New Jersey). It is charged on the current assessed value, which typically rises as homes appreciate — so the dollar amount of tax grows over time even at a fixed rate.
Maintenance and repairs are budgeted at 1% of home value annually ($5,000 per year on a $500,000 home). In practice, newer construction runs lower and older homes run higher. Major systems — roof, HVAC, plumbing — can spike costs dramatically in any given year, which is why a reserve is essential rather than optional.
The cost of capital at 3% was calibrated when 30-year fixed mortgage rates were 3 to 4%. At current rates of 6 to 7%, mortgage interest alone approaches 5% of the purchase price annually in the early years of ownership. This makes the true total unrecoverable cost closer to 7 to 9% — significantly higher than the traditional 5% rule assumes.
Where the rule works and where it does not
The 5% rule works well as a fast market-screening tool when interest rates are low (3 to 4%). In those conditions, it reliably identifies markets where buying is cost-competitive. It is quick to apply and avoids the complexity of a full model.
It breaks down in three situations: the current higher-rate environment (the true cost of capital is 6 to 7%, not 3%); markets with unusually high property taxes or maintenance needs (older Northeast stock, coastal flooding risk); and any decision where time horizon is the key variable. The rule is entirely agnostic about whether you plan to stay 2 years or 20 years — but those two scenarios can produce opposite correct answers.
The 5% rule vs the full net-worth model
The 5% rule answers the question: 'Is buying cheaper in annualized unrecoverable-cost terms?' The full model in this calculator answers: 'Which scenario leaves me with more net worth at my specific horizon?' These are related but meaningfully different questions.
A market might clear the 5% threshold — buying appears cheaper on cost — but still produce a better renter net worth at a 5-year horizon because transaction costs have not been recovered. Conversely, a market above the threshold might still favor buying at a 20-year horizon because rent growth has eliminated the renter's monthly savings advantage. Use the 5% rule as the first filter; use this calculator for the decision.
Frequently asked questions
What is the 5% rule for renting vs buying?
The 5% rule states that the annual unrecoverable cost of owning is approximately 5% of the home price: roughly 1% for property tax, 1% for maintenance, and 3% for the cost of capital. If annual rent is less than 5% of the purchase price, renting is likely cheaper on a cost basis. If annual rent exceeds 5% of the price, buying may be cost-competitive.
How do I apply the 5% rule?
Calculate 5% of the home price and divide by 12 to get the monthly equivalent. On a $500,000 home: 5% is $25,000 per year, or $2,083 per month. If you can rent a comparable home for less than $2,083, renting is likely cheaper in pure cost terms. If you are paying $2,500 per month in rent, buying at $500,000 looks cost-competitive by the rule.
Who popularized the 5% rule?
Financial planner and educator Ben Felix popularized the 5% rule framework as a practical shortcut for the rent-vs-buy decision. It simplifies the concept of unrecoverable ownership costs — the portion of housing spending that provides no financial return, unlike principal paydown, which builds equity.
What are the limits of the 5% rule?
The rule ignores: (1) your specific time horizon — transaction costs make buying a bad deal at short holds even if the rule favors buying; (2) actual mortgage rate — the 3% cost-of-capital component was accurate at rates of 3 to 4%, not 6 to 7%; (3) local appreciation and rent growth rates; (4) your specific investment return assumptions on the down payment.
Does the 5% rule apply at current mortgage rates?
Not precisely. At current rates of 6 to 7%, the mortgage interest component alone approaches 5% of the home price annually — making the total unrecoverable cost closer to 7 to 9%, not 5%. A more accurate threshold at 6.5% rates would be: if annual rent is less than 8% of the home price, renting may be competitive on pure cost terms.
Worked examples
Worked example 1
5% rule applied to a $500,000 home
$500,000 home purchase. 5% rule benchmark = $500k × 5% ÷ 12 = $2,083/month. Scenario rent: $2,100/month.
Monthly mortgage
$2,528
Verdict
Renting wins
At $2,100/month rent versus the $2,083 5% rule benchmark, this market is right on the border. The full model shows renting edges ahead at a 10-year horizon — consistent with what the 5% rule predicts for borderline markets.
Worked example 2
5% rule — clear renting case
$600,000 home, $2,100/month rent. 5% benchmark = $2,500/month. Rent is 16% below benchmark.
Monthly mortgage
$3,034
Verdict
Renting wins
When rent is 16% below the 5% benchmark ($2,500/month), renting is clearly the cheaper annual cash-flow choice. The model confirms renting wins even at a 10-year horizon because the high purchase price and HOA amplify the buyer's unrecoverable costs.
What affects the result
The 3% opportunity cost component of the 5% rule
The 5% rule's three parts: 1% property tax + 1% maintenance + 3% opportunity cost on the home's value. The 3% assumes you could alternatively invest in a diversified portfolio at ~5% real return. If your investment return is higher (7–8%), the opportunity cost threshold rises and the effective break-even rent falls.
Current mortgage rate vs. the 5% rule assumption
The 5% rule was popularised when mortgage rates were 3–4%. At 6.5%, the actual unrecoverable cost of borrowing is higher than 3% on the principal (it averages closer to the rate itself in early years). This means the 5% rule slightly underestimates the break-even rent threshold at current rate levels.
Local property tax rate
The 5% rule uses 1% for property tax. In high-tax states (Illinois, New Jersey, Texas) the rate is 1.8–2.5%. This alone pushes the effective threshold to 6–7% of home value annually, making a meaningful renting case in those markets.
More questions answered
What is the 5% rule in rent vs. buy decisions?
The 5% rule estimates the annual unrecoverable cost of homeownership as 5% of the home's value: roughly 1% for property tax, 1% for maintenance and insurance, and 3% for opportunity cost (what your down payment and equity could earn invested). Divide by 12 to get a monthly benchmark. If your current rent is below this figure, renting is typically the cheaper choice on an annual cost basis.
Who created the 5% rule?
The 5% rule was popularised by Ben Felix, a Canadian portfolio manager, as a simplified version of the rent-vs-buy cost calculation. The three-component breakdown (property tax + maintenance + opportunity cost) reflects the core unrecoverable costs that homeowners pay but renters avoid. It has been widely adopted as a quick screening tool in personal finance.
Does the 5% rule still work with higher mortgage rates?
Partially. The 5% rule uses 3% as the opportunity cost component, which was calibrated at lower interest rate environments. When mortgage rates are 6.5–7%, the actual interest cost in early years is much higher — making the true unrecoverable-cost threshold closer to 6–7% of home value. The 5% rule still gives a useful directional read, but treat the result as a floor, not an exact break-even.
Model assumptions & disclosures
Equal-budget method. Both buyer and renter are assumed to spend the same total amount each month. The person with the lower required outlay invests the monthly difference into a diversified portfolio at the specified annual return. The renter also invests the down payment and estimated closing costs at the start of the comparison period.
Nominal figures. All rates — home appreciation, rent growth, and investment return — are nominal (not inflation-adjusted). Comparisons are internally consistent on a nominal basis.
No tax effects. Mortgage interest deductibility, capital gains exclusion on home sales ($250k/$500k), and investment account tax treatment are not modelled. Since the 2017 Tax Cuts and Jobs Act, fewer than 10% of taxpayers itemise, so the mortgage interest deduction is omitted as a default. Consult a tax professional for your specific situation.
Selling costs applied at horizon end. When computing buyer net worth at your planning horizon, the calculator deducts the specified selling-cost percentage from the home’s projected market value, reflecting the realistic proceeds from a sale.
Not financial advice. This calculator provides illustrative projections based on your inputs. It does not account for personal circumstances such as job security, credit score, local market conditions, or individual tax situations. Consult a qualified financial advisor or real estate professional before making housing decisions.