Renting Won This $400,000 Comparison by $12,705, and It Was Close
Buying is not automatically better than 'throwing money away on rent'. We ran a full five-year comparison including maintenance, selling costs, and what a renter does with the down payment. The result depends on three assumptions, and one of them dominates everything.
The case for buying usually arrives as a single sentence: renting is throwing money away. It is a compelling line and an incomplete one. Mortgage interest, property tax, insurance, maintenance, and transaction costs are also money that does not come back, and in the early years of a mortgage, they add up to considerably more than most buyers realize.
So we ran the comparison properly, over five years, counting everything on both sides.
The scenario
| Buy | Rent | |
|---|---|---|
| Home price / starting rent | $400,000 | $2,200/month |
| Down payment | $80,000 (20%) | Invested at 7% |
| Mortgage | $320,000 at 6.5%, 30 years | n/a |
| Property tax | 1.1% of value annually | n/a |
| Insurance | $1,800/year | $180/year renters insurance |
| Maintenance | 1% of value annually | $0 |
| Annual increase | 3% appreciation | 3% rent increase |
| Selling costs at year 5 | 7% of sale price | n/a |
What ownership actually costs each month
| Component | Monthly |
|---|---|
| Principal & interest | $2,022.62 |
| Property tax | $366.67 |
| Homeowners insurance | $150.00 |
| Maintenance reserve | $333.33 |
| Total | $2,872.62 |
That is $672 a month more than the $2,200 rent, before accounting for the fact that the buyer also has $80,000 tied up in the property. Only $2,022.62 of it is the mortgage payment, the figure most buyers compare against rent, and only a fraction of that reduces the loan balance.
The five-year result
| Buyer | Renter | |
|---|---|---|
| Total paid out over 5 years | $172,357.06 | $140,161.19 |
| Down payment committed | $80,000 | $0 |
| Home value at year 5 (3% growth) | $463,709.63 | n/a |
| Mortgage balance remaining | $299,555.13 | n/a |
| Selling costs (7%) | $32,459.67 | n/a |
| Net equity recovered at sale | $131,694.83 | n/a |
| Investment gain on down payment | n/a | $32,204.14 |
| Net five-year cost | $120,662.23 | $107,957.05 |
Renting comes out $12,705.18 ahead over five years, about $212 a month. That is a real gap, but on a $400,000 decision it is narrow enough that changing any single assumption can reverse it.
The three assumptions that control the answer
1. How long you stay: this one dominates
Selling costs of 7% are charged once, regardless of whether you owned for three years or thirty. Spread over three years they are punishing; over fifteen they are close to irrelevant. Simultaneously, amortization shifts steadily in your favour: by year fifteen a much larger share of each payment builds equity rather than paying interest.
Extend this same comparison to ten years and buying wins comfortably. Shorten it to three and renting wins decisively. If you cannot say with reasonable confidence that you will stay five years, the other variables barely matter.
2. The rent-to-price ratio in your specific market
A useful screening tool is the so-called 5% rule: multiply the home price by 5%, divide by 12, and compare it to the monthly rent on a comparable property. The 5% approximates the unrecoverable costs of ownership: roughly 1% maintenance, 1% property tax, and 3% cost of capital.
On a $400,000 home, that threshold is $1,666.67 a month. Rent above that figure favours buying; rent below it favours renting. In our scenario the rent is $2,200, well above the threshold, which is why the result is close despite the high mortgage rate. In markets where a $400,000 house rents for $1,400, buying is far harder to justify; where it rents for $3,000, buying wins easily.
3. Whether the renter actually invests the difference
The renter's advantage above depends entirely on the $80,000 down payment earning 7% and the monthly savings being invested rather than spent. This is where the theoretical comparison most often diverges from reality.
A mortgage is a forced savings plan. Every payment builds equity whether or not you feel like saving that month, and the illiquidity that looks like a drawback in a spreadsheet functions as a commitment device in practice. Household wealth data consistently shows homeowners with substantially higher net worth than renters at similar income levels, and a meaningful part of that gap is behavioural rather than financial. A renter who invests the difference rigorously does well; a renter who spends it does considerably worse than a buyer.
What the comparison leaves out
- Tax deductibility. Mortgage interest and property tax are deductible if you itemize, but the higher standard deduction means most households no longer do. For those who do itemize, this shifts the comparison toward buying, sometimes substantially.
- Rent risk. The renter's 3% annual increase is an assumption, not a guarantee. Rents can rise faster, and a renter has no protection against being asked to leave. A fixed mortgage payment removes both risks for the term of the loan.
- Maintenance variance. The 1% figure is a long-run average, not a monthly bill. Four quiet years followed by a $22,000 roof replacement averages out the same and feels entirely different.
- Flexibility. Renting lets you take a job in another city with 30 days' notice. That optionality has genuine value early in a career and less later.
- Appreciation uncertainty. The 3% assumption drives a large part of the buyer's return. Real house prices have historically grown far more slowly than nominal figures suggest, and regional variation is enormous.
How to use this
- Estimate your realistic time horizon honestly. Under five years, rent. This single question resolves most cases.
- Apply the 5% rule to your actual market. If comparable rent is well below the threshold, buying needs a strong non-financial justification.
- Compute the full ownership cost, not the mortgage payment. Add tax, insurance, maintenance, and PMI if applicable before comparing to rent.
- Be honest about whether you will invest the difference. If the answer is no, the forced-savings argument for buying is legitimate and should carry weight.
- Do not treat this as purely financial. Stability, control over your space, and the freedom to move are real considerations, and it is entirely reasonable to pay something for them, as long as you know what you are paying.
Frequently asked questions
Is renting really throwing money away?
No more than mortgage interest, property tax, insurance, and maintenance are. In the first five years of the example above, the buyer spent $172,357 and reduced the loan balance by $20,445, meaning roughly $152,000 went to costs that build no equity. Rent buys shelter; those costs also buy shelter. The genuine financial advantage of owning is equity accumulation and leveraged appreciation, and both take years to overcome the transaction costs.
How does a higher mortgage rate change the answer?
It shifts things toward renting, because interest is the largest unrecoverable cost of ownership. At 3% the same $320,000 loan carries a payment near $1,349 rather than $2,023, which changes the comparison dramatically. This is why rent-versus-buy advice from a low-rate era transfers poorly to a high-rate one. The arithmetic genuinely changed, even though the housing stock did not.
Should I buy if I plan to rent the property out later?
That is a different calculation, and the relevant test becomes whether the property works as an investment, rental yield against total costs including vacancy, management, and repairs, rather than whether it beats renting for you personally. Many homes that are reasonable to live in are poor rentals, particularly in expensive markets where prices have outrun rents. Our rental property calculator handles that comparison separately.
Does the 5% rule work in every market?
It is a screening heuristic, not a precise tool. The 3% cost-of-capital component assumes a particular relationship between mortgage rates and investment returns, and the 1% maintenance and 1% property tax figures vary widely. Property tax alone ranges from under 0.4% to over 2.2% depending on the state. Use it to decide whether a full analysis is warranted, then run the actual numbers with your local tax rate and realistic maintenance estimate.
What if I can buy with less than 20% down?
A smaller down payment reduces the capital you have tied up, which helps the buy case, but adds PMI and a larger loan balance, which hurts it. The net effect is usually modestly negative in the early years and depends heavily on the PMI rate. It also raises a separate risk: with 5% down, a modest price decline combined with 7% selling costs can leave you owing more than the sale produces. That risk is largest in exactly the short holding periods where buying was already questionable.
Disclaimer: This article is educational and does not constitute financial, investment, tax, or legal advice. Figures are illustrative and computed from the assumptions stated in the article; your own situation will differ. Verify any decision with a qualified professional before acting on it.