Chapter 1: The Real Rent-vs-Buy Math

Chapter 1: The Real Rent-vs-Buy Math

A Scene from Real Life

Two friends arrived in America the same year. The first bought a small condo after three years with a painfully saved down payment. The second said: “Renting is cheaper, buying is risky.” Ten years later, the first owns a condo worth $60,000 more, with a nearly fixed monthly payment. The second still pays rent that climbed from $1,200 to $1,900, and owns nothing. The difference between them was not luck. It was math.

The Golden Rule: The Five-Year Rule

Before any complex calculation, remember this: if you will stay in the home fewer than five years, renting is usually better. If you will stay five years or more, buying is usually better.

Why five years? Because buying a home has huge entry and exit costs: closing costs when you buy (2-5% of the price), and agent commission when you sell (5-6%). Those costs need years to be offset by appreciation and equity building.

The Real Calculation: Not Payment vs. Rent

The most common mistake: comparing the mortgage payment directly to rent. “The payment is $1,800 and rent is $1,700, so they’re close.” That is wrong, because the payment is not the full cost of ownership.

The true monthly cost of a home = PITI + maintenance:

• P = Principal: the loan portion (builds your equity)
• I = Interest: goes to the bank, builds nothing
• T = Taxes: monthly property tax
• I = Insurance: homeowner’s insurance + mortgage insurance (PMI) if any

Then add 1% of the home’s value per year for maintenance (the golden rule): for a $300,000 home, $3,000 a year or $267 a month.

A Worked Example

A $320,000 home, 5% down ($16,000), $304,000 loan at 6.5% for 30 years:

• Monthly payment (principal + interest): about $1,921
• Property tax (1.2% annually in Massachusetts): $320/month
• Insurance: $150/month
• PMI mortgage insurance (until 20% equity): $150/month
• Maintenance (1% annually): $267/month
• True total: about $2,758/month

Compare that to renting a similar apartment: $2,000. A $758/month gap! But note: of the $1,921 payment, only about $300 is principal in the early years (the rest is interest). So the real “forced savings” is just $300/month at first, growing over time.

When Renting Is Genuinely Better

• You will live in the city fewer than 5 years (temporary job, school).
• Your income is unstable and you cannot absorb repair surprises.
• Home prices in your area are very high relative to rents (price-to-annual-rent ratio above 20).
• You need flexibility to move quickly.

Action Steps

• Compute your area’s price-to-rent ratio: similar home price ÷ (monthly rent × 12). Below 15 = buying is attractive. Above 20 = think hard.
• Ask yourself honestly: will I stay here at least 5 years?
• Budget by the rule: total housing should not exceed 28% of your gross monthly income.
• Never compare payment to rent. Compare full PITI + maintenance cost to rent.

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