How to use this calculator
The simulator runs two households side by side for 30 years. Both spend the same amount each month on housing. The only difference is where the money goes.
- Home Buying Track: the home's price, your down payment, a 30-year fixed mortgage rate, closing costs, property tax, and a monthly budget for maintenance, insurance and HOA fees. Cost Inflation raises taxes and upkeep every year; Appreciation is how fast the home's value grows.
- Renting & Investing Track: your starting rent and how fast it rises. The renter invests the down payment and closing costs on day one, then invests the monthly difference between owning costs and rent (or withdraws it when rent is the more expensive option).
- Investment A and B: two return assumptions for the renter's portfolio, so you can compare a conservative and an optimistic case in one run.
- Terminal Costs: what it costs to sell the home at the end (agent and closing fees) and the capital gains tax rate applied to both sides.
Worked example
Using the calculator's default inputs: a $350,000 home with 20% down ($70,000), $10,000 in closing costs and a 5.5% mortgage. The home appreciates 4% a year, property tax and upkeep rise 3.5% a year, and rent rises 3% a year.
- Mortgage payment (principal & interest): $1,590/month
- Plus property tax ($350) and maintenance & insurance ($550): $2,490/month to own
- Rent for a comparable home is $2,000, so the renter invests $490/month, plus the $80,000 (down payment + closing costs) up front
After 30 years the home is worth $1,135,189. After 7% selling costs and capital gains tax on the gain above the $500,000 exclusion (about $29,000), the buyer keeps $1,026,367 in net home equity. The renter's portfolio, after capital gains tax, is worth $1,570,422 at 10% a year (Investment A) or $2,685,356 at 12% (Investment B).
But change both investment returns to 7% and the renter ends with $680,364, and buying comes out well ahead. The winner depends heavily on the return you assume, so always test a conservative case before deciding.
Unrecoverable costs
The core concept when comparing buying to renting is unrecoverable costs: money you spend and never get back. When you rent, your entire rent payment is unrecoverable. When you buy, your mortgage payment is split between principal (which you keep as equity) and interest (which is unrecoverable).
Homeownership also comes with other unrecoverable costs:
- Property taxes: paid every year, and they usually rise over time.
- Maintenance and repairs: commonly budgeted at around 1% of the home's value per year.
- Insurance and HOA fees: recurring monthly costs.
- Cost of capital: the money tied up in your down payment could have been invested instead. That's its opportunity cost.
The 5% rule
A popular shortcut, the 5% rule, estimates the unrecoverable costs of owning at about 5% of the home's value per year:
- Property tax: ~1%
- Maintenance: ~1%
- Cost of capital, net of appreciation: ~3% (mortgage interest plus the returns your down payment could have earned elsewhere, minus the home's expected price growth)
Multiply the home's value by 5% and divide by 12 to get a break-even monthly rent. For a $350,000 home that's about $1,458/month. If you can rent a comparable home for less, renting and investing the difference often builds more wealth. The rule is only a starting point; the calculator above replaces it with your actual numbers.
Friction and time horizon
Real estate is expensive to buy and sell: closing costs on the way in, and often 6–7% in agent and closing fees on the way out. Because of that friction, buying usually only pays off if you stay put for several years. The longer you stay, the more the mortgage's amortization and the home's appreciation work in your favor to offset those transaction costs.
How the simulation works
- Every month, the mortgage payment is split into interest and principal using a standard 30-year amortization schedule.
- The owner's total cost (mortgage + property tax + maintenance & insurance) is compared with rent. The renter invests the difference, and each portfolio grows at its own monthly equivalent of the yearly return.
- Once a year, the home appreciates, taxes and upkeep rise with Cost Inflation, and rent rises with Rent Inflation.
- At year 30, the home is sold. Selling fees are deducted, and capital gains tax applies only to the gain above the $500,000 primary-residence exclusion. The renter's investment gains are taxed at the same capital gains rate.
Assumptions and limitations
- $500,000 exclusion: this is the U.S. limit for married couples filing jointly who meet the ownership and use tests. Single filers can exclude up to $250,000, so their tax on a large gain would be higher.
- One capital gains rate: the rate you enter is applied to both the home and the investments. To include state income tax or the 3.8% Net Investment Income Tax (which applies only above certain income levels, and not to the excluded part of a home gain), add them to that rate.
- No PMI: with less than 20% down, most lenders add private mortgage insurance, which raises the cost of owning.
- No tax deductions: the mortgage interest and property tax deductions aren't included. Many homeowners take the standard deduction and don't benefit from them.
- Steady returns: home prices and markets move unevenly. The calculator uses constant yearly rates.
- Investment taxes at the end: the renter's gains are taxed once, at year 30, as if held in a buy-and-hold account. Taxes on dividends along the way would lower the result slightly.
Frequently asked questions
Is renting really "throwing money away"?
No more than mortgage interest, property tax and maintenance are. Both options have unrecoverable costs. Renting comes out ahead when rent is low compared with the home's price and the renter consistently invests the difference. The worked example shows how sensitive that is to the return you assume.
What if I move before 30 years?
This calculator uses a fixed 30-year horizon. Over shorter periods, the buying and selling costs weigh much more heavily, which usually makes renting more attractive if you expect to move within about five to seven years.
Why are there two investment returns?
Future returns are uncertain, so the calculator lets you compare two assumptions in one run: for example, a broad stock market index fund and a more aggressive, growth-focused portfolio. Past returns of any index don't guarantee future results.
What happens when renting costs more than owning?
Rent usually rises every year while a fixed mortgage payment doesn't. Once rent is higher than the owner's monthly cost, the renter withdraws the difference from their portfolio, which the simulation includes.