Rent vs Buy Rules of Thumb (And Why Most Are Wrong)

Everyone wants a simple rule. "If X, buy. If Y, rent." And there are several popular ones floating around. Some are genuinely useful as a starting point. Others are dangerously oversimplified.

Let's go through the big four, explain how each one works, and talk honestly about where they break down.

The price-to-rent ratio

This is the most widely cited rule of thumb. Take the home price and divide it by the annual rent for a comparable place.

This ratio is a decent first-pass filter. It tells you whether your local market is tilted toward buyers or renters. San Francisco and New York often have ratios above 25-30. Dallas, Indianapolis, and many Midwest cities sit in the 12-16 range. That's useful context.

Where it breaks down: It ignores interest rates entirely. A price-to-rent ratio of 18 at a 4% mortgage rate is very different from 18 at a 7% rate. It also ignores taxes, maintenance, insurance, and opportunity cost. Two cities can have the same price-to-rent ratio but very different answers to "should I buy here" because of differences in property tax rates or state income tax.

The 5% rule (Ben Felix)

This one comes from a popular YouTube video by Canadian portfolio manager Ben Felix, and it's more sophisticated than most rules of thumb. The idea: multiply the home price by 5%, then divide by 12. That gives you the monthly cost of owning that can't be recovered (what he calls the "unrecoverable cost of ownership").

The 5% breaks down roughly as: 1% property tax, 1% maintenance, and 3% cost of capital (the opportunity cost of your equity, whether that's a down payment or home equity you could otherwise invest). Felix argues that these three costs are the "true" cost of owning, and they don't build equity.

Where it breaks down: The 3% cost of capital figure assumes specific investment returns and mortgage rates. When mortgage rates were 3%, the rule worked differently than it does at 6.5%. The 1% property tax and 1% maintenance assumptions are also averages. If you're in New Jersey (2.2% property tax) or have an older home (2%+ maintenance), your "unrecoverable cost" is much higher than 5%. And the rule doesn't account for tax benefits, rent growth, or home appreciation.

The 3-5 year rule

Simple version: don't buy unless you'll stay at least 5 years. More nuanced version: 3 years might work in a strong market, 7+ years is safer in an expensive one.

The logic is straightforward. Between closing costs when buying (2-5%), agent commissions when selling (5-6%), and seller closing costs (1-2%), you'll spend 7-8% of the home's value just on transactions. On a $400,000 home, that's roughly $28,000 to $32,000. You need enough time for home appreciation and mortgage principal paydown to overcome that hit.

Where it breaks down: In a market appreciating at 8% per year, you could break even in 2-3 years. In a flat market, it might take 7-8. The rule also doesn't consider your specific financing. If you put 3% down and bought at the top of the market, you might be underwater for years. If you put 20% down in a strong rental market, you might break even faster.

The 28/36 rule

This is less about "should you buy" and more about "can you afford to buy." It says your total housing costs (mortgage, taxes, insurance, HOA) should stay under 28% of your gross monthly income. And your total debt payments (housing plus car loans, student loans, credit cards) should stay under 36%.

Banks will often approve you for more than this. Much more. Getting approved for a $3,500/month payment doesn't mean you can comfortably afford it. The 28/36 rule is a guardrail, not a target.

Where it breaks down: Gross income is a blunt instrument. Someone making $100,000 in Houston (no state income tax) has very different take-home pay than someone making $100,000 in California. The rule also doesn't account for your other financial goals. If you're aggressively saving for early retirement or paying off student loans, 28% of gross income for housing might be too much.

Why rules of thumb will always be wrong

Here's the real issue. Every rule of thumb is a simplification that averages away the details. But the details are where the answer lives. Your tax bracket, your state's property tax rate, your specific mortgage rate, how long you'll actually stay, what the rental market looks like in your neighborhood, what you'd realistically earn investing your down payment instead.

These rules are useful as filters. If the price-to-rent ratio in your city is 30, you probably don't need a calculator to know that renting is the better deal. If it's 10, buying is almost certainly cheaper. But for the vast majority of people who land somewhere in the middle, you need to model your actual numbers.

That's what calculators are for. Not the simple ones that just compare "mortgage payment vs rent." The ones that account for all the variables these rules of thumb leave out.