Five Percent Rent-or-Buy Rule
Estimate the rent that matches a home's unrecoverable ownership costs
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 99%
Do not compare monthly rent with the mortgage payment alone. Estimate the owner's unrecoverable costs: property tax, maintenance, borrowing costs and the return forgone by keeping equity in the home. Ben Felix's rough rule bundles these into five percent of the home's value per year—about one percent each for tax and maintenance and three percent for capital costs. Multiply the property price by 5% and divide by 12. The result is the approximate monthly rent with equivalent unrecoverable cost; rent below that level points toward renting on this narrow financial test. The rule is deliberately rough. A real decision should use local inputs and also consider mobility, transaction costs, renovation behavior and personal housing preferences.
Origin
Ben Felix says he developed the 5% rule for a widely viewed rent-versus-own video, while noting that its maintenance and opportunity-cost assumptions may be low.
Core principles
- 01Compare unrecoverable costs rather than rent with the mortgage payment
- 02Home equity carries an opportunity cost
- 03Maintenance and taxes remain costs after principal is excluded
- 04A rough rule should lead to a personalized calculation for a major decision
How to run it
- 1
Match the housing options
Choose a purchase property and a genuinely comparable rental. Avoid comparing homes with different neighborhoods, sizes or quality.
Watch out An unmatched comparison can make either option look artificially cheap.
- 2
Calculate the rough owner cost
Multiply the home price by 0.05, then divide by 12. Treat the result as a monthly estimate of unrecoverable ownership costs.
Pro tip For a $300,000 home, the episode calculates a $1,250 monthly break-even rent.
Watch out Do not interpret the result as the mortgage payment or total cash outflow.
- 3
Compare with market rent
If an equivalent home rents for less than the estimate, renting is favored by this rough financial comparison. If it rents for more, ownership is favored by the same limited test.
Watch out The result is equivalence, not a universal instruction to rent or buy.
- 4
Replace rough assumptions
Use local property tax, realistic maintenance, financing costs and the after-tax expected return on your alternative portfolio. Include emergency liquidity and likely renovation spending.
Pro tip Use a detailed calculator when the decision is real.
Watch out Tax treatment and asset allocation can materially change the opportunity cost.
- 5
Add life constraints
Evaluate expected tenure, mobility, transaction costs, rental security and psychological value. Make the final decision on both financial and personal grounds.
Watch out Buying can lock a young worker into a location or create costly moves as needs change.
In the wild
A prospective buyer considers a $300,000 home. Five percent of the price is $15,000 a year, or $1,250 a month. If a comparable home can be rented for $1,250 or less, the rough rule favors renting financially.
→ The buyer gains a break-even benchmark instead of comparing rent only with the mortgage payment.
After the rough screen, a buyer substitutes local tax, a realistic maintenance estimate and their after-tax portfolio return. They then add expected moving costs because their work may require relocation.
→ The final comparison reflects the buyer's actual costs and mobility rather than the headline rule alone.
Common mistakes
Comparing rent with mortgage only
The mortgage payment omits taxes, maintenance, renovation spending and the opportunity cost of home equity.
Treating five percent as precise
Felix explicitly calls it a rough rule of thumb and says several original assumptions may be low.
Ignoring mobility
A financially close result can still favor renting when ownership would obstruct valuable moves or create repeated transaction costs.
Is it for you?
Best for
Prospective owner-occupiers making an initial financial screen before a detailed housing analysis.
Not ideal for
Decisions with unusual tax treatment, maintenance needs, financing terms or non-financial housing priorities.
From the transcript
“I came up with this idea called the 5% rule.”
“Multiply by 5%. And then divide by 12.”
“5% is a very rough rule of thumb.”
From the episode
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