Is it better to rent or buy?

The full picture

Most rent-versus-buy comparisons put rent next to a mortgage payment. That comparison is not close to like-for-like.

Two figures decide most of it. The first is how long you will stay. Transaction costs at both ends are front-loaded and large, so a short horizon rarely recovers them however the market moves. The second is the maintenance line, which almost every comparison omits entirely and which does not stop when money is tight.

One genuine advantage of owning that a monthly comparison misses: up to $250,000 of gain on sale is excluded from tax for a single filer and $500,000 for a couple, provided you owned and lived in the home for at least two of the five years before selling. It can be used once every two years — not once per lifetime, which is a pre-1997 rule that was repealed. Note also that those amounts are not indexed for inflation and have been fixed since 1997.

Rates move weekly and are published each Thursday, so any figure here is dated. Run the comparison with your own rent, your own quoted rate, and an honest maintenance estimate rather than a national average.

The inputs people get wrong

Rates are the input most often remembered rather than checked. Freddie Mac publishes its survey averages weekly, which means any rate quoted in an article is stale by definition; use the current published average as a sanity check and your own lender quote as the input.

The tax advantage of owning is misunderstood in both directions. The mortgage interest deduction is worth nothing unless you itemise (IRS Topic 501) and is capped at interest on up to $750,000 of acquisition debt for loans taken after 15 December 2017 (IRS Publication 936). The exclusion of gain on sale is the larger benefit for most owners: up to $250,000 for a single filer and $500,000 for a couple filing jointly, subject to ownership and use tests and generally usable no more than once every two years (IRS Topic 701, IRS Publication 523). Note that those amounts are fixed in the statute and are not indexed for inflation.

Maintenance is the line that decides long holds and the one least often budgeted. It is not optional, it does not scale down in a bad year, and on an older property it arrives in lumps. A comparison that omits it will favour buying every time, which is exactly why so many published comparisons do.

Common questions

Is it better to rent or buy?

The comparison that matters is not rent against the mortgage payment. It is rent against the money you do not get back: interest, property tax, insurance, maintenance, and the transaction costs at both ends. On a short horizon, renting usually wins on arithmetic alone, because the costs of buying and selling are front-loaded and large. On a long horizon the balance shifts, but the crossover depends on your own rent, your own quoted rate and an honest maintenance estimate rather than a national rule of thumb.

What do rent-versus-buy comparisons usually leave out?

Maintenance, which does not stop when money is tight, and the cost of getting out. A sale takes months and costs a percentage of the price, which is why a short expected stay rarely recovers what it took to buy. On the other side, the largest advantage of owning is one that a monthly comparison cannot show at all: a substantial part of the gain on a main home can be excluded from tax when you sell, subject to ownership and use tests.

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