What is the 5% rule of home buying?

Multiply the value of the house by 5% and then divide that number by 12 to get your breakeven point. If the monthly rent for a comparable home is below break-even, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, it makes financial sense to buy. The 5% rule was coined by Canadian investment portfolio manager Ben Felix.

It stems from the general consensus among prospective homebuyers that if you can afford to make mortgage payments equal to or less than what you are paying for rent, then buying is a better alternative. However, the 5% rule puts the dilemma of buying versus renting in a different light by taking into account the irrecoverable costs that occur in both cases. A framework provides a structured method for reaching a decision. The 5% rule is such a framework.

It is intended for those without experience in real estate investments to come to a conclusion about the rent in front of the rule is easy to use and provides a quick result. The 5% rule has three components. Each component adds up to 5% of the value of a home. From there, one can decide between renting or As we mentioned, this rule is extremely simple.

But it provides a small frame and a starting point for determining whether renting is better than buying. Buying a home is an important decision and everyone's financial situation is unique. Talking to a financial advisor or tax accountant can also shed new light on the renting vs. In conclusion, Felix points out that if you are a conservative investor, you should use a 4% rule for your real estate purchase.

The 5% rule is well known to real estate specialists and you will often hear it mention if you plan to buy a house in the near future.