Quick answer
The 5% rule estimates the yearly unrecoverable cost of owning as 5% of the home's value: 1% property tax, 1% maintenance and 3% cost of capital. If comparable rent is below price × 5% ÷ 12, renting is likely cheaper. A C$700,000 Canadian home gives C$2,917 a month. At C$2,300 rent, the rule says rent, and our full 10-year simulation agrees.
What is the 5% rule for renting vs buying?
The 5% rule says the unrecoverable cost of owning a home is about 5% of its value each year, so if you can rent a comparable home for less than price × 5% ÷ 12 a month, renting is probably the better financial choice. For a C$700,000 Canadian home that threshold is C$2,917 a month. At the default rent of C$2,300, the rule points to renting. This 5% rule rent vs buy calculator gives you that quick check, a version tuned to your own inputs, and the full simulation, so you can see where the rule holds and where it doesn’t.
Unrecoverable costs are the money an owner spends and never gets back as equity: property tax, maintenance, insurance and the cost of capital. A renter’s equivalent is simply rent. The 5% rule works by comparing like with like. It doesn’t set rent against a mortgage payment, which also includes principal that you keep.
Where the 5% rule comes from
Ben Felix of PWL Capital set out the rule in his 2019 video Renting vs. Buying a Home: The 5% Rule, made for Canadian investors. It has three parts:
| Part | Felix’s estimate | What it represents |
|---|---|---|
| Property tax | ~1% of value | Tax paid every year by owners only |
| Maintenance | ~1% of value | Repairs, replacements, upkeep |
| Cost of capital | ~3% of value | Interest on the mortgage, plus the return your equity gives up |
| Total | ~5% | Annual unrecoverable cost |
The 3% cost of capital comes from two numbers that happened to match in 2019. Mortgages were available at around 3%. And the expected return on stocks at the time (about 6.6%) minus the expected return on real estate (about 3%, a long-run real return of roughly 1.3% plus inflation) also came to about 3%. Because debt and equity cost about the same, the rule didn’t depend much on the size of the down payment.
Felix himself called it a simplification. It’s a quick check, not a full model.
How to use the 5% rule calculator
The calculator shows three results, from simplest to most complete:
- Classic 5% rule: price × 5% ÷ 12, compared with your rent.
- Personalised rule: your property tax + maintenance + insurance + monthly fees (as a percentage of value) + a cost of capital worked out from your own inputs. The cost of capital is your down payment share × (investment return − appreciation) plus the borrowed share × (mortgage rate − appreciation).
- Full simulation: a month-by-month comparison that includes closing costs, selling costs, rent growth and your time horizon. Its break-even rent is the most reliable threshold of the three.
Our personalised version differs from Felix’s original in one way. It subtracts expected home price growth from both the mortgage rate and the investment return. In other words, it treats appreciation as offsetting the cost of all the capital tied up in the home. This gives a lower cost of capital when rates are near or below expected price growth.
Worked example: the 5% rule in Canada
The Canadian defaults are a C$700,000 home, C$2,300 rent, a 4.4% mortgage over 25 years, 20% down, 0.8% property tax, 1% maintenance, 0.2% insurance, 3% appreciation and a 6.5% investment return.
Classic rule. C$700,000 × 5% = C$35,000 a year, or C$2,917 a month. Rent is C$2,300, so the rule says rent.
Personalised rule. Property tax, maintenance and insurance add up to 2.0%. Cost of capital = 0.2 × (6.5% − 3%) + 0.8 × (4.4% − 3%) = 0.70% + 1.12% = 1.82%. The total is 3.82%, or about C$2,228 a month. Rent is C$2,300, so the personalised rule leans slightly towards buying.
Full simulation over 10 years. The C$560,000 mortgage costs about C$3,081 a month on the calculator’s standard monthly-compounding formula. (Canadian fixed-rate mortgages compound semi-annually, which gives about C$3,068.) With tax, maintenance and insurance, owning costs about C$4,248 a month at first, against C$2,325 for renting. After 10 years, renting leads by roughly C$97,000, and the break-even rent is about C$2,804.
So who’s right? The classic rule is. The personalised rule leaves out transaction costs: 2.5% to buy and 5% to sell, or about C$65,000 of costs on this home over the horizon. Those costs are what push the true threshold up from C$2,228 to C$2,804. On these numbers, the classic 5% figure of C$2,917 happens to land close to the full answer.
Check: at a rent of C$2,917, the simulation has buying ahead by about C$22,000 after 10 years, with buying pulling ahead in year 8.
How to customise the 5% rule for your market
Replace each part with a local figure:
- Property tax: use your municipality’s actual rate. Canadian rates vary widely between cities. Many US states sit between 1% and 2%, while the UK has no recurring owner-only property tax, because council tax is paid by renters too.
- Maintenance: 1% is a reasonable average. Use 1.5% to 2% for older detached houses, and less for new builds.
- Condo or HOA fees: convert to a percentage of the price (monthly fee × 12 ÷ price) and add it.
- Cost of capital: recalculate it from your mortgage rate and expected returns. Don’t keep 3% when rates have moved.
- Transaction costs: if you might move within about seven years, add (buying % + selling %) ÷ years you’ll stay.
Here’s what the calculator’s personalised rule gives using each market’s default inputs:
| Market preset | Personalised rule | Monthly threshold | Default rent | Rule suggests |
|---|---|---|---|---|
| Canada | 3.82% | C$2,228 | C$2,300 | Buy (narrowly) |
| Toronto | 4.17% | C$3,649 | C$2,700 | Rent |
| United States | 5.59% | US$1,957 | US$2,100 | Buy (narrowly) |
| New York City | 6.73% | US$4,770 | US$4,200 | Rent |
| United Kingdom | 2.62% | £633 | £1,350 | Buy |
Toronto shows the rule at its most useful. A C$1,050,000 home renting for C$2,700 has a price-to-rent ratio above 32. Even the classic rule’s C$4,375 threshold is far above rent, and the full simulation has renting ahead by roughly C$364,000 over 10 years.
When does the answer flip in Canada?
The full simulation’s break-even rent shifts with your horizon and assumptions. The classic 5% threshold doesn’t move.
| Canadian scenario | Break-even rent | 5% rule threshold |
|---|---|---|
| 5-year stay | ~C$3,180 | C$2,917 |
| 10-year stay (default) | ~C$2,804 | C$2,917 |
| 20-year stay | ~C$2,689 | C$2,917 |
| 10 years, 4% appreciation | ~C$2,386 | C$2,917 |
Over a short stay, the 5% rule is too generous to buying, because a five-year owner has to recover transaction costs over fewer years. Over a long stay, or with faster price growth, it’s too harsh on buying. The rule works best as a first filter. If rent is far below the threshold, renting is very likely the better choice. If rent is far above, buying probably is. Anything close to the threshold needs the full calculation.
Limitations of the 5% rule
- It ignores how long you stay. Buying and selling costs make short stays expensive, and the rule takes no account of them.
- It’s a snapshot. Rent tends to rise over time, while a fixed mortgage payment doesn’t. That favours long-term owners in a way the rule can’t capture.
- It assumes the renter invests the difference. If you wouldn’t, the rule overstates the case for renting.
- It’s sensitive to the cost of capital. One percentage point changes the threshold by C$583 a month on a C$700,000 home.
- It leaves out taxes. In Canada, gains on a principal residence are generally tax-free under the principal residence exemption, while non-registered investment returns are taxed. Use an after-tax return.
- Canadian mortgage terms renew. Your rate resets every one to five years, so today’s rate may not apply for the whole 25-year amortization.
- Down payments under 20% need CMHC insurance, which the rule doesn’t include.
When the classic rule, the personalised rule and the full simulation all give the same answer, you can be fairly confident. When they disagree, as in the Canadian example, trust the full simulation and look at which input is causing the difference.
5% rule checklist
- Work out price × 5% ÷ 12 and compare it with comparable rent, not your current rent.
- Replace each part with local figures: property tax, maintenance, fees.
- Recalculate the cost of capital at today’s mortgage rate.
- If you’ll stay less than about seven years, add transaction costs.
- Confirm the result with the break-even rent from the full simulation.
Related tools and reading
- The 5% rule explained: a longer guide with more examples.
- Canada rent vs buy calculator: the Canadian preset with provincial notes.
- Price-to-rent ratio: another quick way to compare cities.
- How to calculate rent vs buy: a step-by-step method.
- Methodology: how the full simulation works.
The 5% rule and this calculator are for education, not financial advice.
Frequently asked questions
What is the 5% rule for rent vs buy?
It's a rule of thumb popularised by Ben Felix, a portfolio manager at PWL Capital, in 2019. It estimates the costs of owning that you never get back at about 5% of the home's value each year. Divide that by 12 to get a monthly figure. If you can rent a comparable home for less, renting is likely the better financial choice. If rent is higher, buying probably is.
Where do the three parts of the 5% rule come from?
Felix assumed property tax of about 1% of value and maintenance of about 1%. The cost of capital was about 3%, covering mortgage interest on the borrowed part and, on your equity, the gap between expected stock returns (about 6.6%) and expected real estate returns (about 3%). Both came out near 3%, so the rule doesn't depend much on how much you put down.
Is the 5% rule still accurate with higher interest rates?
Not without adjustment. The original 3% cost of capital was based on mortgage rates of roughly 3% in 2019. With Canadian rates around 4.4% in our defaults, and higher in the US, the debt part of the cost of capital is higher. If you subtract expected appreciation as our personalised version does, it can come out lower. Recalculate the figure for your own rate instead of keeping 3%.
Does the 5% rule include closing costs?
No, and that's its biggest blind spot for short stays. Land transfer tax, legal fees and realtor commissions can add 7% to 8% of the price over a purchase and sale in Canada. Over five years that's roughly 1.5% a year on top of the rule. The full calculator includes these costs and the break-even rent reflects them.
What percentage should I use instead of 5%?
Add up your local property tax rate, maintenance (1% for most homes, more for older houses), insurance and condo fees as a percentage of value, and your own cost of capital. In high-tax US states this can easily go above 6%. In parts of the UK and Canada, with low recurring property tax, it can come in under 4%. The calculator shows your personalised percentage next to the classic 5%.
Does the 5% rule work for condos?
Only if you adjust it. Condo fees replace some maintenance but are usually larger than 1% of value a year. Convert the annual fees to a percentage of the price and add them to the rule. A C$600,000 condo with C$600 monthly fees adds 1.2 percentage points.