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It seems common knowledge that it is good to buy a home if you plan to own it for 5+ years as seen in this answer as that is the point at which you will make up for losses(e.g. realtor fee) corresponding with buying a home.

This related question asks when is it sensible to buy a home for a shorter term. My questions are: What factors go into finding the point at which it is more sensible to buy rather than rent? How accurate is the 5 years rule?

Edit: It seems this answer addresses the first part of my question per yoozer8. However, I think the second part of my question still stands.

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    While that question specifically asks about buying with 0 down, the (currently) highest-voted answer pretty much answers your question.
    – yoozer8
    Dec 20, 2019 at 20:31
  • There is likely a theoretical point where approximate costs are even for the two options. In practice though, it is pretty useful to just keep adding capital to a home through mortgage. I would say especially now, with interests having been lower this last decade than most other decades.
    – Stian
    Dec 21, 2019 at 12:37

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Likely everyone's parents.

Like a lot of advice you get from your friends and family, there is no reason "own it for at least 5 years" beside it's a nice round number, and not obviously bad advice.

Dave Ramsey says 2-3 years, which is much easier to back up. I'm going to make a couple of assumptions that most people assume about the housing market.

1) You will always be able to sell your home for what you paid for it.

2) Even with repairs, taxes, insurance, and other new costs, you'll pay about the same as renting a similar place.

You'll pay about 6% commission every time you sell. Let's say you buy a 200k home (200000 * .06 = 12000). Let's also assume appreciation at 3% a year.

So you've got to divide the commission by the months you lived there to determine if it was worthwhile.

after 1 year => 12000 / 12 months = $1000 a month (home worth 203k)

after 2 year => 12000 / 24 months = $500 a month (home worth 207k)

after 3 year => 12000 / 36 months = $333 a month (home worth 213k)

after 4 year => 12000 / 48 months = $250 a month (home worth 220k)

after 5 year => 12000 / 60 months = $200 a month (home worth 226k)

Assuming rent of $1000, at one year there is no advantage.

At 2 years, you see some decent returns, but a major expense like HVAC replacement could wipe this out pretty fast.

At 3 years, the value has appreciated enough to cover the commission, so this is the break-even point.

4+ Years you're turning a profit on paper on your house.

So how did 5 years become conventional wisdom

In this example, 3 years is the break-even point, but I made a lot of assumptions. You may have to replace an HVAC, or have another costly repair which means you'd have to hold it longer. Your house may not appreciate if there is an economic slowdown.

Owning a house is much different than renting one. If you get a great new job somewhere else, sublet the place and move. With a house, you'll have to put it on the market and wait for another buyer.

EDIT: About the assumptions (and stuff I left out).

I left out loan origination and amortization schedules because the 5-year number likely came from people making the same assumptions I stated and running the numbers.

The people who gave you this advice don't know the loan origination costs or the amortization schedule. This answer focused on how 5 years became the rule of thumb. I believe people converged on this number because

1) It gives them enough time to absorb one-time origination costs and commissions. People usually buy another home after selling one, so they'll need enough money to cover the 6% commission.

2) Even in this VERY optimistic scenario, it takes 3 years to break even. Things will probably not go quite this well. 5 years makes this slightly more realistic.

Worth remembering - there are people who bought in 2008 who's property value has still not recovered. Once you know the exact cost and run these numbers yourself and make sure you've looked at a less optimistic appriciation rate.

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    "Assuming rent of $1000" This is the big assumption that consistently bothers me about nearly all buy vs rent recommendations. There is no reason to expect that for $1000 a month you can rent the equivalent of a $200,000 home. For some cities, you will be paying a lot more than that, and for others you will be paying a lot less. It's important to identify the price-to-rent ratio smartasset.com/mortgage/price-to-rent-ratio-in-us-cities in your area and adjust your judgement accordingly. Purchases in areas with a low ratio will pay themselves off much more quickly.
    – Brady Gilg
    Dec 20, 2019 at 20:52
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    In the US, you pay a commission when you sell a home, not when you buy. You could think of that as a "transaction cost" though in the sense that you'll have to pay it when you realize the equity (sell). You do pay closing costs, though which is what you are making up for over that time frame.
    – D Stanley
    Dec 20, 2019 at 21:01
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    You might be like the vast majority of people who are unable to buy a $200,000 house without taking out a loan for which you will pay hundreds of dollars of interest per month.
    – Daniel
    Dec 20, 2019 at 21:17
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    @DStanley: It creates difference between what the buyer pays and what the seller gets. It's called "seller pays" because the sticker price is inclusive, but that has no effect on the economics.
    – Ben Voigt
    Dec 20, 2019 at 21:17
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    Is there a difference between point 1 and 3 that I am missing??
    – Aganju
    Dec 21, 2019 at 1:50
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At the risk of oversimplifying, you basically need to just add up the costs of each option and see what the numbers say. The "five year rule" is certainly not going to be true in all situations.

Buying has fixed, upfront costs which you can't get back (things you typically pay at closing). It's typically expected that monthly rent is more than a mortgage payment would be, so the break even point is essentially the point at which you've made up the fixed costs.

There are detailed calculators available online to give you specific answers, which takes out the guesswork. This particular calculator is helpful because it prompts you for each variable, versus you having to remember what to include from scratch.

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    Mainly, it's a nice round number that may be an overestimate for some people, and will be an underestimate for few people.
    – chepner
    Dec 20, 2019 at 20:53
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If you want to do a strictly economic analysis, the cost of renting a home is just that. You could include the loss of interest on the last month's rent and security deposit, but those are small. The recurring cost of buying is mortgage, insurance, and taxes. Again you could count the loss of interest on the down payment. There is also a substantial transaction cost that needs to be amortized, somewhere around 8%. Some is paid by the seller, some by the buyer, but if you go in and out you will pay it all on one end or the other.

The advantages of owning are appreciation (if it happens in your market), protection from rent increases, and the deductibility (in the US) of the mortgage interest and property taxes on income tax. With the new tax law the deduction is much less valuable because the standard deduction has increased and the state and local tax deduction is capped at $10k. You need to assess your situation.

The big drivers are the rate of appreciation and the rent/purchase price relationship. If the house is appreciating you want to own it. Five years is a guess for the amount of time you need to get enough appreciation to cover the transaction costs, but it is a very rough rule of thumb. The balance between rental rates and house prices is another big driver. Many people do not make the decision on a strictly economic basis, because they are not going to stay long, because they do not have a down payment, because they emotionally want to own their house, or for other reasons. In some markets rents are well below mortgages, in others rather higher. If your market is one of these it may drive you in one direction or the other.

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