Rent vs. buy

Let's address the age-old question of "Rent or Buy?".

Determine what strategy works best for your situation. You might be surprised at how much one, measly percentage point can change your situation.

The reasoning

You're not burning as much money by renting as you think

I'm not saying that rent payments are going into anything equitable; it would be incredibly disingenuous to say so. However, most of a new buyer's mortgage payment goes to interest, property taxes, insurance, and upkeep. People do not factor these costs into their home-buying decision because they're prorated into relatively cheap monthly fees that look like nothing compared to the mortgage payment.

The down payment is the renter's head start

A buyer pays the down payment and closing costs, whereas a renter invests that. At a 7% return, that headstart compounds for as long as the comparison runs, which is why the monthly payment tells you so little (in terms of equity).

Prop 13 rewards staying put

California caps growth in a home's taxable value at 2% a year, so your property tax shrinks as a share of the home's value the longer you own it. It helps the buyer most over the long run, which is exactly where this comparison gets decided.

At these numbers, buying doesn't pencil out. So the real question is: is owning this home worth $239,192 to you over 12 years?

Author's note

I've seen an incredible amount of discourse on social media from people who don't have a buyer's best interest in mind about whether buying a home is better or renting + investing the difference is. I want to show you the numbers in a way that lets you make the decision for yourself.

Opportunity cost is a recurring theme in this publication, so I raise you the following: Sure, the default numbers show that renting + investing beats buying a home, but do you personally value owning a material asset that you can pass down to your children, the feeling of not having a monthly payment for the rest of your life when you pay the mortgage off, the ability to customize your own home, etc. over a dollar figure?

About this model

Rent vs. buy: the short answer

Say you buy a $1 million home with 20% down on a 6% mortgage, instead of renting a comparable home for $4,500 a month. Assuming 3% home appreciation, 3% rent growth, and a 7% market return on the renter's invested savings, buying never overtakes renting in the default comparison. At year 12, the renter's net worth is $938,954 against the buyer's $699,762, a $239,192 gap, and renting and investing stays ahead for all 30 years. The model flags that a reasonable change in home appreciation alone could flip that verdict.

Figures use the model's default inputs, stated in the text. Estimates only, not financial advice.

How the model works

The Outflow rent vs. buy model tracks the net worth of each path month by month and marks the year one overtakes the other, instead of comparing monthly payments. A mortgage payment is partly interest, which is gone, and partly principal, which builds equity. Rent is fully spent, but the renter keeps the $220,000 a buyer would sink into the down payment and closing costs, invested in the market.

Each path's money gone is itemized. For the buyer: closing and selling costs, mortgage interest, and property tax, maintenance, and insurance, offset by home appreciation. For the renter: rent and renter's insurance, offset by investment gains. Home appreciation, market return, and rent growth apply to both paths equally, and the model flags when a reasonable change in any of them would flip the verdict.

Advanced mode adds an investment property and compares four strategies: rent and invest, buy your home, rent your home while owning a rental, or own both. It layers in federal and California tax: Proposition 13 limits on property tax growth, depreciation on rentals, whether passive losses can be used now or get suspended, depreciation recapture and capital gains at sale, 1031 exchange deferral, and tax on the renter's invested gains on the same footing.

Questions

Frequently asked questions

Is it better to rent or buy?

It depends on the numbers, and on how long you stay. With the default inputs, a $1 million home on a 6% mortgage never catches up with renting a comparable home for $4,500 a month and investing the down payment: renting stays ahead for all 30 years. With a lower price relative to rent, or a lower mortgage rate, buying can overtake renting within a normal stay. The model shows you the full curve so you can see where your own numbers fall.

Is renting throwing money away?

No. Rent is spent, but so is most of a buyer's early mortgage payment, which is mostly interest, along with property tax, insurance, and maintenance. A renter who invests the down payment and closing costs builds wealth too. Comparing net worth, not payments, captures both.

How sensitive is the rent vs. buy answer?

Very. The model flags when the verdict would flip with a reasonable change in market return, home appreciation, or rent growth. With the default inputs, a reasonable change in home appreciation alone could flip it, so treat the result as a bet, not an answer.

How does Proposition 13 affect the comparison?

The model caps growth in the home's taxable value at 2% a year, as Proposition 13 does in California, so your property tax falls as a share of the home's value the longer you own it. It's one of the ways California rewards staying put.

What does the model leave out?

Bonus depreciation, the qualified business income deduction, the net investment income tax, and the income phaseout of the passive loss allowance aren't modeled. Maintenance is held flat as a share of the home's value, which is slightly generous toward owning. Tax rates are 2026 figures.