Question 1

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

Accepted Answer

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.

Question 2

Why does renting and investing the difference often outperform buying?

Accepted Answer

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.

Rent vs. Buy & Home Equity Compounding Lab

Unlock with Basic Investor Pro