Buy vs rent guide
The 5% rule for buy vs rent
The 5% rule is a popular shortcut for a buy vs rent question: multiply a home's price by 5%, divide by 12, and compare the result with monthly rent. It is a useful first screen and a poor final answer. This guide shows where the 5% comes from, what it leaves out, and how it holds up against a full calculation.
How the rule works
The idea is that owning has costs you never recover, however the home performs, and renting has only one: the rent. If the owner's unrecoverable costs run at about 5% of the home's value each year, then renting is cheaper whenever annual rent is below that figure, and owning is the better bet when rent is higher.
The 5% is usually built from three pieces: about 1% for property tax, about 1% for maintenance, and about 3% for the cost of capital, meaning the mortgage interest or investment return you give up by tying money into the home. These are rule-of-thumb figures, and your own may differ widely.
Doing the arithmetic
For a $600,000 home, 5% is $30,000 a year, or $2,500 a month. If comparable rentals cost less than $2,500, the rule says renting; if they cost more, it leans toward buying. There is a tidy way to remember it: the rule is the same as saying buying starts to look attractive when the price is about 20 times annual rent. Our guide to the price-to-rent ratio covers that version.
Try it with an illustrative rent of $2,300 a month. That is under $2,500, so the 5% rule says rent. Now compare that verdict with a fuller calculation.
Putting the rule next to a full calculation
Using the same $600,000 home, 20% down, a 4.5% five-year fixed mortgage on a 25-year amortization, Alberta-style costs, 3.5% appreciation, 3% rent growth and 5.5% investment returns, the calculator gives these year-one figures. These are illustrative planning inputs, not market data.
| Cost | Rule of thumb | Full calculation |
|---|---|---|
| Property tax | about 1% ($6,000) | 0.65% ($3,900) |
| Maintenance | about 1% ($6,000) | 1% ($6,000) |
| Cost of capital | about 3% ($18,000) | $28,134 (4.7%): $21,183 of interest plus about $6,951 of return given up on $126,380 of upfront cash at 5.5% |
| Home insurance and extra utilities | not included | $3,300 |
| Total | 5% ($30,000) | $41,334 (6.9%) |
| Less price growth at 3.5% | not included | −$21,000 |
| Net cost after price growth | — | $20,334 (3.4%) |
What the rule leaves out
The rule ignores appreciation entirely. In the table above, 3.5% growth offsets about half of the gross cost. It also ignores principal repayment, which builds equity, the cost of buying and selling, which works against short stays, and rent growth, which raises the renter's costs every year while the owner's mortgage payment stays fixed for the term.
It is also sensitive to inputs it treats as fixed. A high mortgage rate lifts the cost of capital well above 3%, while a low one lowers it. Property tax rates differ by municipality. Condo fees are not captured at all. And the rule says nothing about how long you stay.
- Ignores home-price growth, which can be positive or negative
- Ignores mortgage principal repayment (equity building)
- Ignores closing and selling costs, so it cannot reflect time horizon
- Ignores rent increases over time
- Assumes fixed percentages for tax, upkeep and capital cost
Testing the rule with break-even rent
A cleaner test is to ask: what starting rent makes buying and renting finish even after ten years? The answer depends mostly on the price growth you assume:
| Home appreciation per year | Break-even rent per month | 5% rule threshold |
|---|---|---|
| 0% | $3,271 | $2,500 |
| 2% | $2,631 | $2,500 |
| 3.5% | $2,067 | $2,500 |
| 5% | $1,422 | $2,500 |
When the rule and the calculator disagree
At $2,300 of rent, the 5% rule says rent, yet the full calculation has buying ahead by about $41,686 after ten years because of price growth and principal repayment. At five years the same example is essentially even (−$4), and at three years renting leads by $19,514. So the rule's verdict is a reasonable summary of a short or flat-market stay and a conservative one for a long, growing one.
That is the right way to treat it: as a quick filter that tells you whether to look closer. If rent is far below 5% of the price per year, renting is likely to win unless you expect strong appreciation. If rent is far above, owning deserves a serious look.
A better quick screen
Tailor the percentages. Replace 1% for property tax with your municipality's actual rate, use your own maintenance allowance, and set the cost of capital from your mortgage rate and the return you would expect elsewhere. Then run the main calculator over your own horizon. The rent-equivalent tool gives the rent at which buying and renting break even for your inputs.
Questions people ask
What is the 5% rule in buy vs rent?
It compares annual rent with 5% of a home's price. The 5% approximates unrecoverable ownership costs, commonly split as about 1% property tax, about 1% maintenance and about 3% cost of capital. If rent is below that, the rule leans toward renting.
Is the 5% rule accurate in Canada?
It is a rough screen. Property tax rates, mortgage rates, maintenance and appreciation vary by place and time, so the right figure for you might be higher or lower than 5%.
Why does the rule ignore appreciation?
It is meant to be simple and conservative. Appreciation is uncertain, so the rule counts only costs. That makes it lean toward renting in markets where prices rise.
Does the 5% rule account for how long I will stay?
No. Buying costs and selling costs make time horizon important, and the rule has no way to reflect it. Use a break-even calculation for that.
Official references
Educational information, not financial, tax, legal or mortgage advice. Rules and rates change; confirm current details with an official source or a qualified professional.