What is the 5% rule for comparing renting vs buying real estate?

Ben Felix's 5% rule estimates the unrecoverable cost of homeownership as ~5% of the property value per year: ~1% property taxes, ~1% maintenance/repairs, and ~3% cost of capital (mortgage interest and opportunity cost of equity). If renting an equivalent home costs less than 5% of its purchase price per year, renting and investing the difference builds more wealth.

Why does renting and investing the difference often outperform buying?

Homeowners pay significant unrecoverable costs (closing costs, property transfer taxes, insurance, mortgage interest, condo fees, and maintenance) that renters avoid. When renters invest their initial down payment and monthly savings in a globally diversified index ETF, equity market compounding frequently matches or exceeds leveraged property appreciation.

PRO LAB

Rent vs. Buy & Home Equity Compounding Lab

The largest financial decision of your life, solved with mathematical clarity. Compare 25-year total net worth between buying real estate and renting while systematically investing the savings into global index ETFs.

OPTIMAL FINANCIAL PATH

Rent + Invest Wins

+$218,450 advantage

HOME NET EQUITY (YEAR N)

$1,120,000

Net home value after 5% Realtor selling fees.

ETF LIQUID WEALTH (YEAR N)

$1,338,450

Down payment + monthly cash flow invested at 7.5%.

FHSA + HBP CAPACITY

$100,000

$40k FHSA + $60k RRSP Home Buyers' Plan.

Homeownership vs. Rental Variables

Home Purchase Price ($)

Down Payment ($) Renters invest this initial capital into index ETFs on day one.

Mortgage Rate (%)

Home Price Appreciation (%/yr)

Equivalent Monthly Rent ($)

Annual Rent Inflation (%)

Broad Index ETF Return (%/yr) Historical annualized return of global equities (e.g. VEQT / XEQT).

Simulation Time Horizon 25 years

Net Worth Trajectory Over Time

Comparing liquid investment wealth vs. net home equity (home value minus remaining mortgage minus 5% selling transaction friction).

5-Year Milestone Breakdown

Timeline	Home Net Equity	Rent & Invest Wealth	Leader

← Review Module 14: Housing Rules Explore Index Portfolios →

The 5% Rule Explained

The Unrecoverable Costs of Housing

Rent is not throwing money away. Property taxes, mortgage interest, and maintenance are equally unrecoverable.

COST 01

Mortgage Interest Drag

During the first 10 years of a mortgage, over 60% of every monthly payment goes strictly to bank interest—none of which builds your equity.

COST 02

Property Tax & 1% Maintenance

A $750,000 home requires approximately $7,500/yr in upkeep (roof, HVAC, appliances) and $4,500/yr in municipal property taxes.

COST 03

Opportunity Cost of Capital

A $150,000 down payment locked into illiquid brick-and-mortar forfeits the 7–8% compound return of global businesses in index ETFs.