Should I rent or buy a home?
Buy if you'll stay 5+ years, can afford 20% down without depleting emergency fund, and total housing cost is under 28% of gross income. Rent if you might move within 5 years, live in an expensive market where price-to-rent ratio exceeds 20, or would sacrifice retirement savings to afford the down payment.
Formula
Price-to-Rent Ratio = Home Price ÷ Annual Rent. Under 15 → buy. 15–20 → toss-up. Over 20 → rent.
Example
Home: $500k. Rent for comparable: $2,500/mo ($30k/yr). Ratio = 500k/30k = 16.7. Toss-up — other factors (staying 7+ years, emotional value) tip it toward buying.
How it works in detail
The rent vs. buy decision isn't just about 'building equity vs. throwing money away.' Renting has hidden advantages: investing the down payment difference, no maintenance costs (1–2% of home value/year), flexibility to move, no transaction costs (6% selling fees). Buying has advantages: forced savings via equity buildup, mortgage interest deduction, appreciation, stable housing costs. The price-to-rent ratio is the fastest check: divide home price by annual rent. Under 15 = buy probably wins. 15–20 = toss-up. Over 20 = renting + investing wins. In 2024, major metros (SF, NYC, LA) are often 25–35, meaning renting is mathematically better.
Model rent vs. buy impact on your lifetime wealth
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How much do I need to retire?
Multiply your annual spending by 25. If you spend $60,000/year, you need $1,500,000. This is the 4% rule from the Trinity Study (1998) — withdraw 4% annually with a 95%+ historical success rate over 30 years.
How much house can I afford?
You can afford a home priced at roughly 3–4× your gross annual income, assuming 20% down and total housing costs (mortgage + taxes + insurance) staying below 28% of gross monthly income. On $150,000 income, that's a $450,000–$600,000 home with $90,000–$120,000 down.
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