Rent vs. buy: comparing the yearly cost of owning with rent

In depth7 min read · updated 2 November 2026 · 9 sources

Whether to rent vs. buy is usually framed as rent against a mortgage payment. That comparison is wrong in both directions: part of the mortgage payment is saving, and much of the cost of owning never shows up in the payment. The fair comparison is the yearly cost of owning, which economists call the user cost of housing, against the yearly rent for a similar home. This article shows how to calculate it, what research says about the outcome and how US taxes change the picture in 2026.

The user cost of owning a home

Owning a home ties up money that could earn a return elsewhere, costs property tax, insurance and upkeep, and in exchange the home may rise in value. Himmelberg et al. (2005) argue that price-to-rent and price-to-income ratios on their own are misleading and measure the annual cost of ownership instead; Poterba (1984) developed the asset-market view of this cost, including the role of taxes and inflation. In simplified form:

Buying is cheaper than renting when this cost is below the rent for a comparable home. Equivalently, the price-to-rent ratio, the price divided by a year's rent, must be below one divided by the user cost rate. A user cost rate of 5% breaks even at a price-to-rent ratio of 20, a rate of 6.5% at about 15.

A worked example

The table shows how sensitive the answer is. One percentage point of interest rate or expected appreciation changes the yearly result by $4,000 on a $400,000 home. Appreciation is the least certain input: national averages hide large differences between cities and neighborhoods, and a single house is far less diversified than an index.

How long you stay decides a lot

Transaction costs are paid once, the yearly advantage or disadvantage accumulates. Short stays therefore favor renting, long stays favor buying. Beracha and Johnson (2012) compared buying with renting and investing the difference over more than 30 years of US data: with a holding period equal to the average American's time in one home, renting was the better investment strategy over most of the period.

Owning also has a benefit that the user cost formula misses. Sinai and Souleles (2005) show that a home is a hedge against rising rents: someone who rents is exposed to future rent increases, someone who owns has locked in their housing cost. For most households, this rent risk outweighs the risk of falling house prices, and the effect is stronger the longer a household expects to stay.

Taxes in 2026

The mortgage interest deduction is smaller than its reputation. Interest is only deductible if you itemize on Schedule A, and for loans taken out after December 15, 2017 only on up to $750,000 of debt (IRS Publication 936 2025). Property taxes count toward the deduction for state and local taxes, which in 2026 is capped at $40,400, reduced for incomes above $505,000 but not below $10,000 (IRS, SALT limit 2026 2026).

Selling is more favorable. Gains on the sale of a main home are tax-free up to $250,000, or $500,000 on a joint return, if you owned and lived in the home for at least two of the last five years (IRS Topic 701 2026). Renters who invest the difference pay tax on their gains, unless they invest through retirement accounts (401(k) vs. IRA).

Housing as an investment

Over the long run, housing has been a good investment. Jordà et al. (2019) find that across 16 countries since 1870, residential real estate earned real total returns similar to stocks, about 7% a year, with much lower volatility. Two caveats apply to an individual buyer: the total return includes the rent you save, which is exactly what the user cost comparison counts, and one house in one city is concentrated and leveraged, unlike a national index. More on housing as an asset class in real estate investing.

The down payment is the other side. Money in a down payment does not earn stock market returns, and money invested in stocks does not pay off the house. That is why r in the formula is the opportunity cost of the down payment and the mortgage rate on the rest, not zero. Renters only come out ahead if they actually invest the difference, which is the assumption behind the study by Beracha and Johnson (2012).

Common mistakes

• Comparing rent with the mortgage payment: principal repayment is saving, while upkeep, taxes and the opportunity cost of the down payment are missing.
• Ignoring transaction costs: closing and selling costs of several percent each need years of savings to recover.
• Extrapolating recent price gains: expected appreciation is the most uncertain input; national averages say little about one house.
• Counting the full mortgage interest as a tax saving: with the 2026 standard deduction of $32,200 for couples, many owners do not itemize.
• Renting without investing the difference: the case for renting assumes that the savings are invested.

This article explains general principles and is not financial or tax advice. Property taxes, insurance and prices differ widely by location; use your own numbers.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.