Is renting throwing money away?

Those who ask "is renting throwing money away" usually compare rent with a mortgage payment. That's the wrong comparison. For one month, rent gives you a place to live. The same goes for the share of an owner's bill that never returns: interest, tax, insurance and repairs. When you compare them, rent often costs less, though this isn't true in every city.

What owners pay that never comes back

Money spent with nothing left except a roof is what economists call unrecoverable costs. Ben Felix, a Canadian portfolio manager, popularized the idea in a rent versus buy video. An owner faces many such costs:

• Interest on a mortgage. According to the CFPB, most of each early payment covers interest rather than principal.
• In the US, property tax averages about 0.94% of a home's value each year.
• On our basis, home insurance runs about $1,308 each year.
• Costs of upkeep. Our annual upkeep budget is 1% of the value, but a roof or furnace can push it much higher.
• The lost return comes from cash used for a down payment that could have earned 8.3% yearly in a fund.
• You pay closing costs of about 3.5% when buying and 6% when selling.

For a typical US owner, Zillow and Thumbtack estimate $16,566 each year for tax, insurance and upkeep alone. Zillow's count puts that at about $1,380 a month plus the mortgage.

Is renting a waste of money next to a mortgage?

This comparison covers the country as a whole. The Census American Community Survey reports median gross rent of $1,413 a month. At the typical US home value of $332,700, ownership really costs about $2,950 a month during year 1. It counts the payment at 7.24%, then tax, insurance and upkeep, plus what 20% down loses in return.

Equity is the portion of a home you own outright, and only a small part of that builds it. In year 1, that portion is principal you pay down, and it's small on a new loan.

This isn't a perfect match. A typical rental home is smaller than a typical home you own. To correct the mismatch, our city pages compare the rent and price of matching homes from Zillow's data.

Is renting throwing money away if you invest the difference?

No. Here, the renter has to do the work. You can come out ahead as a renter only if you keep your down payment invested. Any monthly savings from cheaper rent should also go into the fund. Personal finance writer Ramit Sethi told CNBC that rent covers a roof, a landlord's upkeep and your freedom to leave. Sethi also said that he himself had made more by renting and investing than owning would have earned.

An owner has one true advantage here. A mortgage requires you to set aside a little money every month, though many of us won't do that independently. In the end, owners do have greater wealth on paper. The Federal Reserve found that renters had a median net worth of $10,400 in 2022, compared with $396,200 for the median homeowner. The house alone can't explain the difference, since owners start out older and earn more.

When renting is a bad choice

At times, rent really is the larger loss. These situations tend to favor buying:

• You will stay for a long time. Buying catches up in year 10 at the median break-even point in cities where it catches up.
• Rent keeps going up. Since 2006, rents have gone up about 3.5% each year, based on the BLS price data, while fixed payments stay the same.
• You won't invest the money you save. The renter's main advantage is gone without it.

Is renting worth it for you?

Most people can settle the issue with four answers:

• How long you'll stay where you are.
• What verdict your city gives at today's numbers.
• Whether you'd truly invest the cash you keep.
• How much freedom to move is worth to you.

Next, use the rent vs buy calculator to work out your own figures. Using Freddie Mac's latest rate, today's numbers put renting ahead over 7 years in 580 of 813 US cities.