A renter is in love with a homeowner. How much do they owe?

Everyone loves to talk rent vs. buy, right?

Jan 20, 2025

A modern dilemma

A happy, unmarried couple decides to live together. One partner already owns their home, so the other moves in and rents from them. How much should the renting partner pay?

This could be one of the couple’s first major discussions about personal finance. Many people wouldn’t know where to start, and confusion can lead to conflict over how to calculate a fair rent. The phrase “I don’t want to help pay someone else’s mortgage” has been known to arise here.

This question is tough because it targets widely misunderstood concepts about how housing costs work. Many people see buying a home as an inherently superior position to renting. A renter paying half of all costs can’t be fair. But living for free is surely too far in the other direction. How do you reach a number that makes sense?

Three methods

We can divide the ways of calculating rent into a few buckets:

Vibes
Market rate
Split costs

Among couples seeking a balanced arrangement, the vibes-based method is probably the most common. Renting and owning seem incommensurable, so let’s pick a number that sounds right. A little less than half the mortgage maybe? That can work if everyone is okay with it. But this Substack is here to help people apply numbers to their own lives. You don’t have to be a math freak to think there must be something better than vibes.

The second technique, using market rates, is easy. Sometimes. Find some comparable rentals in your area, adjust for minor differences from your place, and divide by two. Wow, you just baked yourself a scrumdiddlyumptious market rent. This works great for an urban condo. But ... maybe there aren’t many rental comps in your rural town for (say) a three-bedroom, 2000 sqft house. Or maybe those properties are in very different condition than yours, or have different amounts of land, or anything else. You might need to look at other markets and do some intelligent estimation.

You can also split costs. You could split evenly or, if you already divide joint expenses 60/40 based on incomes, you could divide housing expenses that way too. We’ll proceed assuming a 50/50 split, but we’ll also show how to deal with other ratios. Split costs might produce a more or less expensive rent than the market rate, but either way you could argue that it’s the fairest arrangement among people trying to live as partners. We already mentioned that renting and owning are incommensurable ways of paying for housing — they can’t be strictly compared on a common measuring stick. So how do you calculate a “fair” rent when living with a homeowner? The rest of this post will describe why renting and owning a home are so distinct, but how we can set them (roughly) equal anyway. A full example is at the end.

The costs of owning a home

Paying rent is simple, which is one of its virtues. A renter’s expenses might also include utilities and renter’s insurance. Utilities don’t differ between owners and renters, so we don’t need to think about them much. Renter’s insurance is far less expensive than homeowner’s insurance, because it doesn’t cover the dwelling. So as long as you have a normal residential lease, rent is the predominant cost, and it’s predictable within the term of the lease.

Buying a home, with or without a mortgage, entails more complex expenses. Aside from mortgage payments on principal and interest, they include:

Property tax
Homeowner’s insurance
Maintenance and improvement, including surprise repairs
Possible HOA fees (or similar fees by another name)
Possible private mortgage insurance (PMI; a small expense)
High transaction costs

At first glance, we can just add these expenses to find the total cost of ownership. But wait — not all of these costs are the same. When you pay down the principal balance of your loan, you’re gaining equity in a home that you could choose to sell. Your payment toward principal is recoverable. On the other hand, property tax is like rent: you pay it and receive no asset you can sell later. Here is a crucial distinction to understand: recoverable costs vs. unrecoverable costs.

We can see right away how this applies to our situation. Let’s invent a couple with pointedly gender-neutral names, Bongo and Java. We’ll say Java owns the home and Bongo is moving in as a renter. If they want to split costs, which costs do they need to split? Java pays some recoverable costs, like principal payments on the mortgage and improvement expenses. (Of course, these expenses aren’t guaranteed to return as cash when selling the home: the remaining value may be more or less than the original cost. “Recoverable” just means you’re paying for some asset.) Java also has to pay unrecoverable costs like mortgage interest, property tax, insurance, maintenance, and HOA fees.

Since Java is gradually buying more of an asset by paying down the principal loan balance, clearly Bongo shouldn’t help pay that. It’s a recoverable cost! So we just need to add up the unrecoverable costs and divide by two, right? Yes! Nearly. We need to find all the costs of ownership first — and consider the risks that aren’t easily quantified.

Sneaky costs

The big point in this section is about implicit cost, which we’ll cover below. First let’s quickly address the sneakiness of maintenance. Every homeowner is aware of maintenance costs, but may not appreciate how much they can fluctuate. If costs have been minimal so far, it’s not a good idea to extrapolate that to the next ten years. Homes have occasional replacement expenses that not everyone plans for: major appliances, roof and siding, windows, sewage and plumbing, etc. Some repairs and replacements are sudden and unpredictable: a damaged roof not (fully) covered by insurance, or a fridge that dies just after the warranty period. Average annual maintenance costs are usually 1-2% of home value, and the average is what should be factored into rent. I would lower the range for some condos, but that cost is mostly shifted to higher HOA fees. Of course a new build tends to demand less maintenance than a Victorian, so you can adjust estimates to your personal situation.

Maintenance is distinct from improvement, which is widely loved by American homeowners. Renovations can be a huge expense, and arguably very little of the cost should be shared with a partner who’s renting from you. From a market rate perspective, improvements can (but don’t always) increase the rent. But from a split cost perspective, improvements are a recoverable cost (even though many of them cost more than their market value-add).1

A full comparison of buying vs. renting will be the subject of a future post. I’ll summarize here by adding that homeowners have less liquidity, are more exposed to surprise expenses, have some potential tax advantages (in the US), bear the risk of home price declines, and have high transaction costs. A risk like discovering that your foundation needs repair to the tune of tens of thousands of dollars can’t be translated to a certain amount of rent. It makes homeownership fundamentally different than paying the same rent every month.

Even sneakier

So far we’ve addressed out-of-pocket expenses. Owning a home also has an opportunity cost, which is the implicit cost you accept by forgoing alternatives. If you spent an hour scrolling on social media, you could’ve spent that hour walking outside or reading a book made of paper or socializing with 3D people in real meatspace. The opportunity cost is the difference between what you actually did and the best alternative.

In our case, every dollar committed to home equity could have been invested elsewhere. To illustrate, let’s say we’re on the market for a new home and have enough money to buy in cash, if we choose. We consider three options:

Option A is a cash purchase (100% down)
Option B is putting 20% down
Option C is renting a similar home

Let’s focus first on the contrast between A and B. Most people would think that buying outright with no mortgage sounds great. But what do we give up with Option A? Compared to B, we immediately commit another 80% of the sale price to buying the home. How is that a drawback? Consider the opportunity cost.

The most salient alternative to putting more money down on a home is buying stocks, because stocks are an accessible, tax-efficient asset class with higher expected return than housing. A diversified stock fund is also highly liquid: you can sell your portfolio on short notice at the quoted market price. Real estate has low liquidity.

Let’s consider what we get, financially, with buying home equity vs. stocks. Globally since 1900, stocks have returned about 5% above inflation, whereas housing has appreciated about 1% above inflation.2 Using only US data doesn’t fundamentally change the picture (it actually gives a greater advantage to stocks). We’ll use a four-point advantage for stocks, but if you want to adjust it for whatever reason, it wouldn’t change the concept.

Since round numbers are nice, let’s say our home budget is $500K. If we pick Option A, we have to drop $500K immediately. The opportunity cost of all that capital tied up in a home has an expected value of around 4% of equity each year: $20K. But if we instead put down $100K with Option B, the opportunity cost in the first year would be only about $4K.

A home with no mortgage has the highest opportunity cost. With less equity and a mortgage, opportunity cost is lower. This may seem abstract and useless — why wouldn’t we buy in cash if we have the money? Consider that in Option B, we have $400K left over for a stock portfolio with an annual expected return of ~8%. That’s not abstract.

We would, of course, owe interest on the mortgage. But if we decided to steal from our fat stock portfolio to pay extra on the mortgage, we’d be missing the potential stock gains! So the choice isn’t between letting our money (a) pay down the mortgage or (b) sit on its ass in a checking account. We can hold stocks, which weakens the relative benefit (if any) of paying down the mortgage and reducing future interest.

Renting with Option C offers a more extreme contrast with A. We could pay rent and a security deposit, then invest nearly $500K in stocks. Our monthly expenses would be greater than with A, but we’d have a huge, liquid portfolio with high expected return.

Big numbers like $500K are not the point. Regardless of the amount, opportunity cost is real because each dollar can have only one job. When you pay for an asset, you sacrifice the ability to put the same money to work in a potentially more productive venture. I am not saying “don’t pay off your house” or “minimize your down payment”. I am only saying: opportunity cost is real and affects your net worth.

They haven’t heard about opportunity cost.

Real numbers

Let’s work an example where Bongo is moving in with Java, the homeowner. We want to add up the unrecoverable costs of owning Java’s home. To make the math super easy to reproduce, we’ll say that Java just bought a detached single-family house, has a 30-year fixed-rate mortgage, and makes the minimum payment every month in Year 1.

Most homebuyers put down less than 20%, but Java is a great saver and paid $100K on a $500K home. The interest rate is 6% on a loan of $400K. In Year 1 of minimum payments, $4,912 will pay down the principal balance and $23,866 will pay interest. (83% goes to interest, sadly!) You can use any online mortgage calculator to recreate these numbers.

We’ll make the following assumptions: 1.5% for maintenance ($7,500), 1% for property tax ($5,000), 0.75% for insurance ($3,750), and 0.25% for HOA fees ($1,250). Property tax, insurance, and HOA fees can change quickly, but they’re relatively predictable. The cost you assume should be based on your current costs, with a reasonable assumption of growth. Maintenance is different: it can swing between trivial amounts of money in a lucky year to many thousands of dollars in another. So you can’t use last year’s value; you have to estimate an average.

Over the next year, the loan balance will fall from $400,000 to $395,088, and the average loan balance will be $397,773.3 Equity is the home value minus the loan balance, so Java’s average equity during Year 1 will be $102,227. You don’t need to be this precise; you could just average your loan balance in Month 1 and Month 12. We’ll multiply average equity by 4% to find the opportunity cost, which is $4,089.

The sum of unrecoverable costs — interest, maintenance, tax, insurance, HOA fees, opportunity cost — is $45,455 in Year 1. On a monthly basis, that’s $3,788 total or $1,894 per person. That’s the rental equivalent for Bongo!

This approach isn’t limited to an even split. If Bongo couldn’t comfortably afford $1,894 per month while Java can afford their half, that might be a good sign to discuss how to divide all joint expenses based on income or wealth differences. What if they move forward with a 60/40 split because Java’s after-tax salary is 50% higher? We take 40% of $3,788 and settle on a rent of $1,515 instead.

Let’s return to the even split scenario. If we didn’t account for opportunity cost, Bongo’s monthly rent would be $341 lower. In later years, opportunity cost will only grow as Java gains equity. At some point Java will pay off the mortgage: the interest expense will be gone and out-of-pocket expenses will be much lower than in Year 1. The opportunity cost factored into rent will reflect that Java has $500K+ tied up in the home, whereas Bongo can direct money toward stocks (which are liquid and have higher expected return).4

Of course, the rental “equivalent” we calculated relies on a set of assumptions. You may want to question them, or you may think there are other factors to consider. The homeowning partner might ask, what about all the nice furniture I bought whose cost isn’t included in these categories? For major expenses like this, you could assign the furniture a lifetime — say 15 years for new, high-quality items — and add one month’s share to your partner’s rent. A $20,000 furnishing project would add $56 to Bongo’s monthly rent by this reasoning. You could be more sophisticated by observing that most depreciation occurs in the early years, but at that point you’ve spent too much effort on a small task. Keep processes simple and err on the side of generosity when dealing with your partner. Obviously don’t be a miser and raise rent by three cents when you buy a paper towel holder.

Further resources

Every Money IRL post is organized in The Omni-Post, and all vocab terms are here.

The subreddits r/RealEstate and r/FirstTimeHomeBuyer are great forums for learning about the varieties of home-buying experience. Start with the bat-infested Victorian.

Ben Felix and the Rational Reminder podcast have, in my view, the clearest explanations of how to compare renting and buying a home. For quick videos, see here. For longer-form content, check out these podcast episodes.

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