Does the 5% rule still work for renting vs. buying?

What the 5% rule says

Ben Felix, a portfolio manager at PWL Capital, laid out the rule in a 2019 article. His point was that comparing a mortgage payment with rent is the wrong comparison, because part of a mortgage payment builds equity you get back later. What you should compare is the money you never get back. For a renter, that's the rent. For an owner, he estimated it at about 5% of the home's value per year:

• Property tax: about 1%.
• Maintenance: about 1%.
• Cost of capital: about 3%. That's the interest on the money you borrow, plus what your down payment would have earned in stocks minus what it earns in the house.

To use it, multiply the home's value by 5% and divide by 12. If you can rent a similar home for less than that, renting is a sound financial choice. For a $500,000 home, that's $25,000 a year, or $2,083 a month.

Felix called the rule an oversimplification himself. For people who invest conservatively or mostly in taxable accounts, he suggested something closer to 4%.

What changed since 2019

The 3% cost of capital assumed mortgage rates near 3%, which is about where they were when Felix wrote it. On November 5, 2026, Freddie Mac's weekly survey put the average 30-year fixed rate at 7.18%.

Interest is the biggest piece of the rule, so that change is hard to ignore. On a $400,000 loan (20% down on $500,000) at 7.18%, the first month's interest is $2,393. That alone is more than the rule's entire monthly budget of $2,083, before property tax, insurance, or maintenance. The house still gains value, and that offsets part of the cost, but you need a full calculation to see how much.

How we tested it

Instead of guessing a new percentage, we asked the calculator on this site to find it. The calculator steps through every month of the stay: mortgage payments, property tax, insurance, maintenance, appreciation on the full value of the home, closing costs on the way in, selling costs on the way out, and the federal tax effect of itemizing. The renter invests the cash the buyer puts into the house, plus whatever renting saves each month. When owning is the cheaper month, the owner invests the difference instead. At the end, both sides cash out.

Then we searched for the rent at which both sides finish with the same wealth. Multiply that rent by 12, divide by the home price, and you get the rule that fits these assumptions. The base case:

• $500,000 home, 20% down, 30-year fixed at 7.18%
• Property tax and maintenance at 1% of the price each, as in the rule, growing 3% a year
• Homeowners insurance $1,392 and renters insurance $155 a year, Maryland's statewide averages. Maryland's effective property-tax rate, 0.97%, is close to the rule's 1%
• Home prices and rent both grow 3% a year
• Investments return 7% a year after taxes and fees
• Buying costs 2% and selling costs 6% of the price
• Married filing jointly on $150,000 of income, for the mortgage-interest deduction estimate

Open the base case in the calculator →

The result: closer to a 7% rule

Over a 10-year stay, buying and renting tie at $2,860 a month, or 6.9% of the price per year. Here is how that changes with how long you stay.

Even a 30-year stay doesn't get back to 5%. It lands at 6.4%. Short stays look worse because buying and selling costs, 8% of the price here, get spread over fewer years. Over 3 years, those costs alone add about 2.7% a year.

At 2019 rates, the rule holds up

Change only the mortgage rate back to 3% and the same model lands at 4.4% for a 10-year stay, a little under 5%. So the rule wasn't wrong when Felix wrote it. It was built on a mortgage rate that's no longer on offer. Between 3% and 7.18%, each point of mortgage rate adds about 0.6 points to the tie point.

Which assumptions matter most

Home appreciation moves the answer the most. At 5% a year, the tie point drops to 5.2%, close to the original rule. At 2%, it rises to 7.6%. The investment return matters less. Lowering it from 7% to 5% after tax brings the tie point down to 6.3%, because the renter's invested savings grow more slowly.

A worked example: $2,500 rent

Say a home like the one you rent would sell for $500,000, and your rent is $2,500. That's above the rule's $2,083, so the 5% rule says buying looks like the better deal.

The full model disagrees. In the first month, owning costs $3,449 after the estimated tax benefit, including $2,710 of principal and interest. Renting costs $2,513 with renters insurance. The renter keeps the $110,000 the buyer spends up front, invests all of it except the security deposit, and invests the monthly difference too. Rent rises 3% a year, so the gap narrows, but not fast enough. After 10 years and a sale, the renter is ahead by about $71,000.

Open this example in the calculator →

How to use the rule now

• For a quick screen at today's rates, use about 7% instead of 5%: home price × 7% ÷ 12. For a $500,000 home, that's $2,917 a month.
• If you might move within 5 years, use a higher number, around 7.5%.
• If rates fall and you refinance, buying looks better. This test keeps one rate for the whole stay.
• Near the threshold, a rule of thumb can't settle it. Your actual tax bill, an insurance quote, and the rate you're offered matter more than the shortcut.
• Money isn't the whole decision. Stability, control over your home, and the freedom to move are real, and no percentage captures them.

Limits of this test

This is one model with one set of assumptions, not a forecast. It uses statewide averages instead of quotes, keeps the mortgage rate fixed with no refinancing, estimates only the federal tax effect, and assumes returns and appreciation that may not happen. The full method and its limits are in the model notes.

Sources

• Benjamin Felix, “Rent or Own Your Home? A Handy 5% Rule”, PWL Capital, May 11, 2019.
• Freddie Mac, Primary Mortgage Market Survey, 30-year fixed average for November 5, 2026, as reported by the Associated Press.
• State insurance averages and the calculator's method: Buy or Rent model notes.