Chapter 2: Rent vs buy, the honest comparison
Over the next seven years, Jamie's $2,200 apartment will absorb about $204,000. The $400,000 house Jamie keeps touring will absorb about $282,000 over the same stretch. Read those two numbers alone and renting wins in a landslide, which is exactly why nobody should read them alone: the house gives some of its money back and the apartment gives back nothing. The Personal Finance Guide, Chapter 20 settled the slogan war (rent is not "throwing money away," and a mortgage is not automatically wealth). This chapter builds the full machine, runs Jamie through it year by year, and shows you where the answer flips.
Count only the money that never comes back
The clean way to compare is to count each path's unrecoverable costs: dollars that leave and never return as wealth. The mortgage payment itself fails this test as a measuring stick, because part of it (principal, the slice that repays the loan) moves from your checking account into your home equity, your ownership stake. Principal is your own money changing pockets. Everything below is not.
Owning's unrecoverable list:
- Mortgage interest. The price of borrowing, and in the early years most of the payment (Chapter 6 shows the curve).
- Property tax and homeowner's insurance. Together about 1.4% of the home's value per year in a typical market, so $5,600 a year on $400,000.
- Maintenance. Roofs, water heaters, gutters: budget about 1% of value per year, $4,000 on that house.
- PMI, private mortgage insurance, if you put down less than 20% (Chapter 4 demystifies it).
- HOA dues, if the property has them.
- Transaction costs. Roughly 2–5% to buy and 8–10% of value to exit, paid once but real, which is why they punish short stays.
Renting's unrecoverable list is shorter: rent, the annual increases, and renter's insurance. The renter's secret weapon sits off the list: the down payment and closing money never left the investment account, so it keeps compounding.
Jamie's seven-year trace
Same person, same city, two doors. Door one: keep renting at $2,200 with 3% annual increases. Door two: buy the $400,000 house with 10% down ($40,000), about $12,000 of closing costs, and a $360,000 loan at 6.55%.
Seven years of owning, every unrecoverable dollar:
| Owning, years 1–7 | Cost |
|---|---|
| Mortgage interest | $158,000 |
| Property tax + insurance (1.4%/yr) | $39,000 |
| Maintenance (1%/yr) | $28,000 |
| PMI ($120/mo until year 4) | $6,000 |
| Closing costs to buy (3%) | $12,000 |
| Selling costs at exit (8% of $492,000) | $39,000 |
| Total unrecoverable | $282,000 |
The PMI line ends early because 3% appreciation plus principal paydown push Jamie's equity past 20% around year four, and Jamie has it removed (Chapter 4 covers the request). The give-back: at 3% a year the house is worth about $492,000 in year seven, so $92,000 of appreciation, the rise in the home's value, offsets the bill. Net cost of owning: about $190,000.
Seven years of renting: $202,000 of rent (that 3% escalator compounds) plus about $1,500 of renter's insurance, call it $204,000. The give-back: the $52,000 that never went into the house grows at an assumed 7% a year in a diversified portfolio, adding about $31,500. Net cost of renting: about $172,000.
One number in the owning column deserves a long stare before the verdict: $158,000 of the seven-year bill is interest, more than half the total. Nothing went wrong there. Early payments on a 30-year loan are mostly interest because the balance is at its largest, and the mix improves every year you hold (Chapter 6 traces the whole curve). This is a second reason long stays favor owning: the interest share of each payment falls over time, while rent only climbs.
Verdict at year seven: renting wins by roughly $18,000. Run the same machine to year ten and the verdict flips, with owning ahead by about $16,000, because the transaction tolls were paid once while rent climbed every single year. The crossover lands around year eight or nine on these assumptions, and "these assumptions" is doing real work in that sentence: nudge rent growth to 4%, or appreciation to 2%, or the portfolio to 8%, and the crossover slides by years. That is the honest answer. The rent-vs-buy question is a horizon question wearing a money costume, and your own numbers belong in the machine:
The 5% shortcut, and where it lies to you
For a fast screen without a spreadsheet, there is a classic shortcut: owning's yearly unrecoverable cost runs near 5% of the home's value (about 1% property tax, 1% maintenance, 3% for the cost of capital). Divide by 12 and compare to rent on a similar home. With 2026 borrowing costs at 6.55%, a fairer figure is about 6%: on a $400,000 house that is $24,000 a year, or $2,000 a month, against Jamie's $2,200 rent. A close call leaning buy for a long stay, which matches the full trace.
The shortcut breaks in predictable places, and knowing them matters more than memorizing the rule:
- High-tax states. A 2.2% property tax (New Jersey, parts of Illinois and Texas) adds more than a full point. The 6% becomes 7%+ and renting gains ground.
- HOA-heavy condos. A $400 monthly fee on a $400,000 condo is another 1.2% a year that the shortcut never saw.
- Hot vs flat markets. The shortcut quietly assumes appreciation roughly offsets part of your capital cost. In a flat or falling market, it does not.
- Short stays. Transaction costs live outside the formula entirely. Under five years they dominate, and the shortcut flatters buying.
The column money cannot measure
Both sides of this choice buy real things that never show up in the trace, and pretending otherwise produces tidy spreadsheets and bad decisions.
Stability, control, and a forced savings plan
Nobody can decline to renew your lease or sell the building out from under your kids' school district. You can paint, renovate, plant, and keep the dog. The principal slice of every payment is automatic saving, and a fixed principal-and-interest payment never gets a rent increase: inflation slowly shrinks it while rents climb. For many owners, that 30-year price lock is the single biggest financial win.
Flexibility, mobility, and a fixed worst case
A better job in another city costs you a security deposit, not 8–10% of a house. The water heater is the landlord's 2 a.m. problem, and your worst housing month costs exactly one rent check. Renting keeps your money liquid and diversified instead of concentrated in one building on one street. While your life is still in motion, that option is worth real money.
Maya earns $220,000 plus RSUs in a coastal city where her $3,800 rental would cost about $1,100,000 to buy. She ran the machine: with 20% down, owning that condo carries roughly $6,800 a month in unrecoverable costs alone (about $4,800 of first-year interest on an $880,000 loan, $1,300 of tax and insurance, $700 of HOA), against $3,800 in rent. The 6% shortcut agrees: $5,500 a month to own versus $3,800 to rent. So Maya renews the lease, autopilots the $3,000 monthly gap into index funds, and leaves her $220,000 of would-be down payment invested. In her market, renting is the wealth-building move, and she rechecks the math once a year in case the market changes its mind.
Under about 5 years, rent: the 8–10% exit toll almost always wins. Past 7–10 years, buying usually wins if the full payment passes Chapter 3. In between, run your real numbers through the calculator, and let the non-financial column break ties, because it is allowed to.
Where people go wrong
- Comparing rent to the mortgage payment. The payment includes principal (your own money) and excludes tax, insurance, maintenance, and the exit toll. Both errors flatter buying.
- Treating the renter's give-back as automatic. The $52,000 only compounds if it stays invested. A renter who spends the difference loses to almost any owner.
- Treating appreciation as a promise. The 3% in this chapter is an assumption built on national averages (FHFA measured 3.26% from 2024 to 2025). Individual markets fall, and a single house is not a diversified index.
- Forgetting that the verdict expires. Rents rise, rates move, markets shift. Maya's annual recheck is the habit; the answer you got at 28 is not the answer at 34.
Key takeaways
- Compare unrecoverable costs, never payments: owning loses interest, taxes, insurance, maintenance, PMI, and transaction tolls; renting loses rent and increases, minus the growth of the never-spent down payment.
- On Jamie's numbers ($2,200 rent vs a $400,000 house at 6.55%), renting is about $18,000 ahead at year seven and owning is about $16,000 ahead at year ten. The horizon, not the slogan, picks the winner.
- The 5% shortcut (closer to 6% at 2026 rates) is a fast screen: value times 6%, divided by 12, against rent on a similar home. It breaks in high-tax states, HOA condos, flat markets, and short stays.
- Owning buys stability, control, and a payment inflation shrinks; renting buys mobility, liquidity, and a fixed worst case. Both are real, and ties may be broken by how you want to live.
Sources: The Finvest Personal Finance Guide · CFPB: Buying a House · Bankrate: Current Mortgage Rates