The 5% Rule Rent vs Buy: Ben Felix's Shortcut, Explained and Adjusted
Short answer
The 5% rule says the yearly unrecoverable cost of owning is about 5% of the home's value: 1% property tax, 1% maintenance and 3% cost of capital. Multiply the price by 5% and divide by 12. If you can rent a similar home for less than that, renting is likely cheaper. Adjust the percentages for local tax, rates and expected returns.
Key takeaways
- Formula: home price × 5% ÷ 12 = monthly rent threshold. Rent below it favours renting.
- The 5% is 1% property tax + 1% maintenance + 3% cost of capital, set by Ben Felix in 2019 when mortgage rates were about 3%.
- With 2026 rates and local taxes, the right percentage ranges from about 4% to over 8% depending on the market.
- The rule ignores transaction costs and time horizon, so confirm with a full break-even rent calculation.
What is the 5% rule rent vs buy shortcut?
The 5% rule says the annual unrecoverable cost of owning a home is roughly 5% of its value, made up of about 1% property tax, 1% maintenance and 3% cost of capital. Multiply the home’s price by 5% and divide by 12: if you can rent a comparable home for less than that monthly figure, renting is likely the better financial choice; if rent is higher, buying probably is. It is a quick screen, not a full answer.
The rule matters because it moves the rent vs buy question onto the right footing. Instead of comparing rent with a mortgage payment, it compares rent with what owning actually costs and never gives back. If you want to run it instantly, use the 5% rule calculator.
How to use the 5 percent rule: a worked example
Take a home worth US$420,000, our calculator’s US default.
- Multiply by 5%: US$420,000 × 0.05 = US$21,000 a year.
- Divide by 12: US$21,000 ÷ 12 = US$1,750 a month.
- Compare with rent for a similar home. Our default US rent is US$2,100.
Because US$2,100 is above US$1,750, the plain 5% rule says buying looks better. Keep that result in mind: below, we will see that adjusting the rule for 2026 interest rates reverses it.
Where the 5% comes from
Ben Felix of PWL Capital introduced the rule in 2019. His argument was that renters’ unrecoverable cost is rent, while owners’ unrecoverable costs are property tax, maintenance and the cost of capital. Mortgage principal is excluded, because it is saving, not spending.
| Component | Felix’s figure | What it represents |
|---|---|---|
| Property tax | 1% | Annual tax as a share of home value (Felix was writing from Canada) |
| Maintenance | 1% | Long-run average upkeep, a common rule of thumb |
| Cost of capital | 3% | Mortgage interest plus the opportunity cost of the down payment |
| Total | 5% | Annual unrecoverable cost of owning |
How Felix got to 3% cost of capital
The cost of capital has two parts:
- Cost of debt: the mortgage rate on the borrowed share. In 2019, Canadian mortgage rates were about 3%.
- Cost of equity: the return the down payment could have earned in stocks, minus what it earns in the house. Felix cited the Credit Suisse Global Investment Returns Yearbook, which showed long-run global real returns of about 5.2% for stocks and 1.3% for real estate from 1900 to 2017. Using PWL’s forward-looking expected stock return of 6.57% and about 3% for real estate gave a gap of 3.57%, which he rounded down to 3%.
Because both parts were about 3%, the blended cost of capital was 3% whatever the size of the down payment. That neat coincidence is also why the rule needs adjusting today.
Why the 5% rule needs adjusting in 2026
Three of the rule’s inputs vary widely by market and over time:
- Mortgage rates. Freddie Mac’s Primary Mortgage Market Survey put the US 30-year fixed rate at about 7.2% in early November 2026, more than double Felix’s 3%.
- Property tax. It is zero for owners in the UK (council tax is paid by renters too) and in Dubai, but over 2% in some US states.
- Expected investment returns and price growth. The gap between them sets the cost of equity. Where home prices are expected to grow almost as fast as a portfolio, the cost of equity is small.
The rule also leaves out home insurance and service charges, which can be significant, especially for apartments.
The 5% rule adjusted by country
The table below rebuilds the rule for each market using Felix’s method and our calculator’s late-2026 defaults: property tax + maintenance + insurance + service charges + (loan share × mortgage rate) + (deposit share × (investment return − price growth)).
| Market | Plain 5% threshold | Felix-method % | Adjusted threshold | Default rent | Calculator break-even rent (10 yrs) |
|---|---|---|---|---|---|
| United States | US$1,750 | 8.4% | US$2,940 | US$2,100 | ~US$2,310 |
| United Kingdom | £1,210 | 5.3% | £1,290 | £1,350 | ~£800 |
| Canada | C$2,920 | 6.2% | C$3,630 | C$2,300 | ~C$2,810 |
| Australia | A$3,750 | 6.4% | A$4,790 | A$2,800 | ~A$2,720 |
| UAE (Dubai) | AED 7,500 | 5.8% | AED 8,630 | AED 10,000 | ~AED 5,290 |
| India | ₹33,300 | 8.7% | ₹58,000 | ₹30,000 | ~₹35,300 |
| Germany | €1,880 | 5.0% | €1,870 | €1,500 | ~€1,850 |
| Singapore | S$6,250 | 4.1% | S$5,060 | S$4,500 | ~S$3,710 |
| Ireland | €1,580 | 4.7% | €1,500 | €1,900 | ~€420 |
| Spain | €1,170 | 4.7% | €1,090 | €1,200 | ~€830 |
The last column comes from our full month-by-month simulation, which includes transaction costs, rent growth and price growth on the whole home. It is the rent at which renting and buying leave you equally well off after ten years.
What the table shows
- High rates push the percentage up sharply. In the US and India, Felix’s method gives over 8%, because mortgage rates of 6–8.5% are charged on 80% of the price.
- No property tax pulls it down. The UK and Dubai sit near 5% even with higher rates, because owners pay no annual property tax in our defaults.
- The plain 5% rule can point the wrong way. For the US default home, the plain rule says buy (rent of US$2,100 is above US$1,750), but the full simulation says rent (US$2,100 is below the ~US$2,310 break-even). For Singapore and Australia, the plain rule says rent, but the full simulation narrowly favours buying.
A known limitation: appreciation on the borrowed money
Felix’s structure credits home price growth only against the deposit (through the cost of equity) and charges the full mortgage rate on the borrowed share. But the whole home appreciates, not just the part you paid for in cash. If you credit growth on the full value instead, the percentages fall a lot: about 5.6% for the US, 2.6% for the UK and 3.8% for Canada.
Neither version is exact. In every market in the table above, our calculator’s break-even rent falls between the “whole-home” figure and the Felix-method figure. That is a useful practical guide: the plain rule gives a rough screen, the Felix-method adjustment gives an upper bound, and a full calculation gives the answer.
What the 5% rule does not capture
- Transaction costs. Stamp duty, transfer tax and agent fees can be 4–15% of the price for a round trip. They make short stays far more expensive than the rule implies. See the rent vs buy break-even point.
- Time horizon. The rule is a steady-state annual figure; it says nothing about whether you will stay long enough.
- Rent growth. Rising rents favour owners over time; the rule treats rent as fixed.
- Leverage. With a small deposit and strong price growth (Ireland, with 10% down and 5% growth in our defaults), buying wins far more often than the rule suggests.
- Tax. Mortgage interest deductions, capital gains exemptions on your home and taxes on investment returns all shift the numbers.
- Behaviour. The rule assumes the renter invests the down payment. Many do not. See renting and investing vs buying a house.
How to build your own 5% rule
- Write down your property tax, maintenance and insurance as percentages of the home’s value. Add any monthly fees × 12 ÷ price.
- Multiply your mortgage rate by the share you will borrow (for example 0.8 × 6.3% = 5.04%).
- Subtract your expected home price growth from your expected after-tax investment return, then multiply by your deposit share (for example 0.2 × (7% − 3.5%) = 0.7%).
- Add it all up. That is your personal percentage.
- Multiply by the price and divide by 12. Compare with rent.
- Confirm with a full simulation in the rent vs buy calculator, which adds transaction costs and your time horizon.
For the related ratio-based shortcut, see our guide to the price-to-rent ratio. This article is general information, not personal financial advice.
Run your own numbers
Every rule of thumb above depends on your rent, price, rate and how long you stay. Use the 5% Rule Rent vs Buy Calculator below — it starts with local defaults you can change.