Homeownership vs Renting

For decades, the question “Should I buy or keep renting?” has been answered with emotion more than math. Homeownership is sold as the cornerstone of the American Dream, while renting is dismissed as “throwing money away.” Both slogans are half-truths. The real answer lies in cold, hard Return-On-Investment (ROI) calculations that vary dramatically by location, timing, and personal finances. Here’s how to run the numbers properly so you can decide with your spreadsheet instead of your heart.

The Two Paths: What You’re Actually Comparing

When you rent, nearly 100% of your monthly housing payment is an expense. You get shelter, but no asset.

When you buy, your monthly payment splits into four buckets:

• • Principal pay-down (forced savings that increases your equity)
  • Interest (an expense, at least initially)
  • Property taxes and insurance (expenses)
  • Maintenance and Home Owners Association (HOA) fees (expenses)

The difference between the total house payment and pure rent is your “extra cost of ownership.” If home prices or rents rise, ownership can turn that extra cost into massive leverage. If they stagnate or fall, renting often wins.

The Core ROI Formula Every Buyer Should Memorize

A simplified but surprisingly accurate way to compare the two options over a specific time horizon (usually 5–10 years) is the “Rent vs. Buy Break-Even” calculation made famous by The New York Times calculator:

Unrecovered Ownership Costs =
(Down payment × foregone stock-market return)

• • • (Closing costs both ways)
    • (Extra monthly cost of PITI* + maintenance − rent) × years
    • (Expected selling costs 5–6%)
      − (Home price appreciation × purchase price)
      − (Principal pay-down over the period)

✅Kentucky Tom Pro Tip: PITI means Principal, Interest, Property Taxes, and Homeowners Insurance.  Many mortgage or bank lenders (and most online calculators) also add one or two more items to the “full payment,” even though they’re not part of the official PITI acronym:  HOA dues and Mortgage Insurance.

If the total is positive, renting was cheaper. If negative, buying put more money in your pocket.

Most people are shocked to discover the break-even horizon in high-cost coastal cities is often 7–12 years, while in many Midwestern and Southern markets it can be as little as 2–4 years.

The 5% Rule:  A Quick-and-Dirty Shortcut

Real estate investor and author Ben Felix popularized an even faster heuristic: multiply the purchase price of the home by 5%. That’s roughly the annual “hidden rent” you pay to own (property taxes ≈ 1%, maintenance ≈ 1%, foregone stock returns on down payment and equity ≈ 3–4%). If your actual yearly rent is lower than that 5% figure, renting is probably the better deal. If rent is higher, buying usually wins.

Example:
$600,000 house x 5% = $30,000/year “ownership rent”
If comparable units rent for $2,000/month ($24,000/year), renting is likely superior.
If they rent for $3,800/month ($45,600/year), renting is throwing money away.

The rule works because it implicitly accounts for opportunity cost, taxes, and maintenance without spreadsheets.

Leverage: The Double-Edged Sword

The single biggest reason homeownership has created more millionaires than any other asset in America is leverage. When you put 20% down, a 5% annual price increase becomes a 25% return on your cash invested. That’s why even modest appreciation (3–4%/year historically) can crush stock-market returns after leverage.

But leverage cuts both ways. A 10% price decline wipes out 50% of your equity with only 20% down. During 2008–2012, millions discovered that renting quietly preserved their net worth while owners were underwater.

Example:  Positive case

• • • You buy a $500,000 house in 2020
    • You put 20% down → $100,000 of your own cash
    • You borrow $400,000 with a mortgage

One year later the house is worth $525,000 (a very normal +5% appreciation)

What happened to your money?

• • • Old equity: $100,000 (your original down payment)
    • New equity: $525,000 – $400,000 remaining mortgage = $125,000
    • You made $25,000 in 12 months on a $100,000 investment

Example:  Negative case

 Same house, same $100,000 down, same $400,000 mortgage.  2008 happens and the house drops 20% in value in 18 months.  New value $400,000.

• • • Your equity is now $400,000 – $400,000 mortgage = $0
    • You are “underwater:” You owe exactly what the house is worth.

If prices fall another 10% (total −30% from peak, which happened in many cities):

• • • House worth $350,000
    • Mortgage still ~$390,000
    • Equity = −$40,000: You are $40,000 upside-down.

The Tax Angle

As of 2025, the standard deduction remains $14,600 single / $29,200 married, meaning most buyers under roughly $120k–$150k income no longer itemize and get zero mortgage-interest deduction benefit. The $10,000 SALT cap also blunts the property-tax deduction in high-tax states. Run your own numbers; the tax tail no longer wags the dog for middle-class buyers.

✅Kentucky Tom Pro Tip:  SALT Cap means the State And Local Tax deduction cap. 

 Note:  I’m not a Tax Advisor and this is not tax advice.  Please consult with your Tax Advisor.

The Real-World Numbers (National Median, December 2025)

Median home price: ~$420,000
Typical 30-year mortgage @ 6.8%: ~$2,400/month PITI
Median comparable rent: ~$2,100/month
Average historical appreciation: 4.1% nominal (1975–2025)
Average stock market return: ~10% nominal

Using the 5% rule: $420k × 5% = $21,000/year
Actual median rent $25,200/year:  slight edge to buying nationally

But in San Francisco or Boston, the same math often flips dramatically toward renting.

For Your Consideration

Run the calculator for your specific metro area (NYT, NerdWallet, or Ramsey Solutions all have excellent free versions). Then stress-test it:

• • What if prices only rise 2% instead of 4%?
  • What if I only stay 4 years instead of 10?
  • What if rents rise 6%/year but home prices only 2%?

The cities where buying crushes renting today are generally the same places where rents have risen faster than home prices over the last decade (think Phoenix, Tampa, Nashville, Charlotte). The places where renting still wins big are the usual suspects: San Francisco, San Jose, New York, Boston, Seattle.

Homeownership is not inherently better or worse than renting. It’s a leveraged bet on future housing costs in your specific market. Treat it as the financial decision it is, not a lifestyle choice, and you’ll make the right call, whether that means signing a mortgage or renewing your lease with a smile.

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