Rent or Buy? The Answer Depends on How Long You'll Stay

“Renting is throwing money away.” Most of us have heard it from a relative. There's some truth in it, but owning has costs you never get back too: interest, property tax, insurance, upkeep, and the cost of buying and selling. The honest answer is that it depends mostly on how long you'll stay.

The case we'll compare

• A $400,000 home with 20% down and a 30-year mortgage at 6.5%.
• Property tax of 1.1% a year, upkeep of 1% and $1,800 a year of insurance.
• The home rises 3% a year; buying costs 3% and selling 6%.
• The alternative: rent a similar place for $2,200 a month, with 3% yearly increases, and invest the down payment and the monthly difference at 6%.

The price-to-rent ratio here is 15.2 (price ÷ yearly rent). As a rough rule, under 15 tends to favor buying and over 20 tends to favor renting. We're right in the gray zone.

Who comes out ahead, by years

In this example, buying starts to win from about 15 years. Before that, the costs of buying and selling (around 9% of the price) are too heavy to recover. At 7 years, the gap is $22,370 in favor of renting.

What changes the answer

• If the home only gains 1% a year, after 10 years renting wins by $88,654.
• With a 7.5% mortgage, after 10 years renting wins by $51,376.
• If the equivalent rent were $1,800, after 10 years renting wins by $83,460.

What the numbers don't show

1. Buying makes you save: the principal part of each payment is forced savings. Many renters don't actually invest the difference, and then buying wins much more easily.
2. Renting gives you the freedom to move for work or family without paying a 6% commission.
3. As an owner, big repairs (a roof, an AC unit) show up without warning.