Rent vs. Buy: A Financial Decision Framework

The cultural narrative often pushes homeownership as the ultimate sign of adulthood and financial success. However, renting is not "throwing money away"—it's paying for a service (shelter) without the financial risks of ownership. Deciding between the two requires a cold, hard look at the numbers.

The 5% Rule

A helpful heuristic for comparing the unrecoverable costs of renting vs. buying is the 5% Rule. The unrecoverable cost of renting is just your rent. The unrecoverable costs of buying are typically around 5% of the property value annually:

• 1% Property Tax
• 1% Maintenance
• 3% Cost of Capital (The interest you pay + the opportunity cost of your equity)

if your annual rent is lower than 5% of the home's purchase price, renting might be the financially superior option.

Flexibility vs. Stability

Renting (Flexibility)

Renting is buying flexibility. If you get a job offer in another city, you can move with minimal cost. You don't have to sell a house (paying 6% agent fees) or worry about a market downturn trapping you.

Buying (Stability)

Buying is purchasing control and stability. You can paint the walls, renovate the kitchen, and know that your landlord can't sell the building out from under you. It locks in your housing cost (mostly) for 30 years.

The "Forced Savings" Argument

One strong argument for buying is that a mortgage acts as a forced savings account. Every month, a portion of your payment goes towards principal, building equity. Many renters struggle to save the difference between their cheaper rent and a mortgage payment, often spending it instead.

Conclusion

There is no improved universal answer. In high-cost-of-living cities, renting is often cheaper. In growing suburbs, buying often wins. Run the numbers, consider your 5-year plan, and don't let peer pressure dictate your largest financial decision.