Renting vs. Buying: Why

There is a persistent belief in society, drilled into us by parents, real estate agents, and banks, that renting is "throwing money away" while buying is "building equity." It sounds logical: one payment goes to a landlord, the other goes into your own pocket. If only it were that simple.

This binary view ignores the fundamental mechanics of capital. The truth is, homeownership comes with massive unrecoverable costs—money that leaves your pocket and never comes back. To make a fair comparison, we need to stop looking at monthly payments and start looking at the total cost of capital.

In this detailed breakdown, we will explore the "5% Rule," the hidden costs of equity, and why a renter who invests the difference can often end up wealthier than a homeowner.

The Myth of "Paying Yourself"

When you pay rent, 100% of that money is an unrecoverable cost. You are paying for a service: shelter. This is easy to understand. However, when you pay a mortgage, a significant portion of that money is also unrecoverable.

During the first 5-7 years of a 30-year mortgage, the vast majority of your monthly check goes to the bank as Interest. Interest is rent on money. You are renting the bank's cash to buy the house. That money is gone forever, just like rent paid to a landlord.

The Three Hidden Killers of Home Equity

Beyond interest, homeowners face three other major unrecoverable costs that renters do not:

1. Property Taxes (The Forever Rent)

Even if you pay off your mortgage completely, you never truly own your home free and clear. You must pay property taxes to the government forever. In the US, this ranges from 1% to 3% of the home's value annually. On a $500,000 home, that is $5,000 to $15,000 a year that disappears.

2. Maintenance (The 1% Rule)

Roofs leak. Boilers explode. Termites eat wood. A generally accepted rule of thumb in real estate is that you should budget 1% of the home's value per year for maintenance. Not renovations (which add value), but maintenance (keeping the house standing).

Renters do not pay for broken water heaters. Landlords do.

3. Cost of Capital (Opportunity Cost)

This is the most overlooked factor. When you put $100,000 down on a house, that money is trapped. It is "dead equity." If you had rented instead, that $100,000 could have been invested in the stock market (e.g., S&P 500), which has historically returned ~10% annually.

By locking that cash in drywall and timber, you are losing the potential gains it could have earned elsewhere. This is a real cost.

The 5% Rule: A Quick Heuristic

Canadian portfolio manager Ben Felix popularized the "5% Rule" to quickly compare renting vs. buying. It estimates the total annual unrecoverable cost of owning a home.

The Renting Advantage: Flexibility as an Asset

Financials aside, renting buys you something money often can't: Mobility. Buying a home is a massive illiquid commitment. Selling a home costs 6-10% of the home's value in agent fees and closing costs.

If you are young and career-focused, being able to move to a new city for a 20% raise is valuable. Being tied to a mortgage might prevent you from taking that opportunity. Renting is purchasing freedom.

The Verdict

Buying isn't bad. It offers stability, forced savings, and protection against rent inflation. But it is not an automatic win. If you rent but spend the difference on lifestyle, buying wins. But if you rent and invest the difference aggressively, you can often build a portfolio that outpaces home equity.

Don't rely on rules of thumb from 1980. Use real data. We created a comprehensive tool to handle the complex math of opportunity costs, appreciation, and taxes. Use our Rent vs. Buy Calculator to see which path builds more wealth for your specific situation over 10, 20, or 30 years.