The Real Math of Renting vs. Buying
"Renting is throwing money away." It's one of the most persistent myths in personal finance. The truth is that homeownership involves throwing plenty of money away, too—it just goes to the bank, the county tax assessor, and the plumber instead of a landlord.
Unrecoverable Costs
To compare renting and buying fairly, you must compare the unrecoverable costs of both choices over the same time horizon.
- Renter's Unrecoverable Cost: 100% of the rent paid.
- Buyer's Unrecoverable Cost: Mortgage interest, property taxes, homeowners insurance, HOA fees, maintenance (budget 1% of the home's value per year), closing costs to buy, and agent commission to sell.
The 5-to-7 Year Rule
Buying a home acts as a forced savings account because a small portion of your monthly payment goes toward the principal. Furthermore, homes generally appreciate in value (historically around 3-4% per year).
However, buying a home is expensive. You pay 2-5% of the purchase price in closing costs just to get the keys. When you sell, you pay roughly 6-8% in agent commissions and fees. It usually takes 5 to 7 years of living in the home for the equity build-up and appreciation to outpace those massive transaction costs. If you move in 3 years, renting is almost always the cheaper mathematical choice.