The 5% Rule Revisited (2024)

The decision of whether to buy or rent a home has become one of the most debated topics in personal finance. While some believe that owning an asset is always better than paying rent, others look at the cost of ownership as too high to make it worthwhile.

Luckily, Canadian portfolio manager and YouTuber Ben Felix developed a rational approach to answering the rent vs. buy decision that he calls the 5% rule.

Here is how the 5% rule works. Multiply the value of the home by 5%, then divide that number by 12 to get your breakeven point. If the monthly rent on a comparable home is below the breakeven point, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, it makes financial sense to buy.

In this article, I’ll review the 5% rule and expand on the discussion by focusing on some of the crucial questions that the 5% rule does not address and other critical questions you should ask before deciding whether to rent or buy.

The 5% rule

The idea behind the 5% rule is to compare what Ben Felix calls the “unrecoverable costs” of renting and buying a home.