The 5% Rule: A Simple Way to Evaluate the Rent vs. Buy Decision

💡Comparing mortgage payments to rent is a flawed way to evaluate the rent vs. buy decision.

🔑To make an accurate comparison, consider the total unrecoverable costs of renting and owning.

💰The 5% rule provides a simple calculation: multiply the value of the home by 5% and divide by 12.

🏠If you can rent for less than the monthly costs derived from the 5% rule, renting is the wiser financial choice.

🔄The 5% rule is an oversimplification and may change based on variables like tax rates and portfolio asset mix.

Why is comparing mortgage payments to rent flawed?

—Comparing mortgage payments to rent is flawed because it does not consider the total unrecoverable costs of owning a home, including property taxes, maintenance costs, and the opportunity cost of equity capital.

What is the 5% rule?

—The 5% rule is a simple calculation that helps evaluate the rent vs. buy decision. Multiply the value of the home by 5% and divide by 12. If you can rent for less than that monthly cost, renting is the wiser financial choice.

What are unrecoverable costs?

—Unrecoverable costs are expenses that you pay with no associated residual value. In the context of renting vs. owning, it includes property taxes, maintenance costs, and the opportunity cost of equity capital.

Is the 5% rule applicable in all scenarios?

—The 5% rule is an oversimplification and may need to be adjusted based on variables like tax rates and portfolio asset mix. It provides a quick reference but should be used as a starting point for the rent vs. buy decision.

What other factors should be considered when deciding to rent or buy?

—In addition to financial factors, personal circumstances, such as flexibility, long-term plans, and lifestyle preferences, should be considered when deciding to rent or buy a home.

00:00Comparing mortgage payments to rent is a flawed way to evaluate the rent vs. buy decision.

00:51To make an accurate comparison, consider the total unrecoverable costs of renting and owning.

05:06The 5% rule provides a simple calculation: multiply the value of the home by 5% and divide by 12.

06:54If you can rent for less than the monthly costs derived from the 5% rule, renting is the wiser financial choice.

09:43The 5% rule is an oversimplification and may change based on variables like tax rates and portfolio asset mix.