5 Percent Rule in Real Estate: What It Is and Why It Matters

Ever wonder if buying a home is worth it compared to renting? The 5 percent rule gives you a fast, back‑of‑the‑envelope check. It says that if the annual rent you’d pay is less than 5 % of a property’s purchase price, renting might be the cheaper move. If it’s higher, buying could make sense.

It’s not a magic formula, but it’s a handy first filter. You can run the numbers while sipping coffee and get a feel for whether a deal deserves a deeper dive.

How to Apply the 5 Percent Rule

Step 1: Find the listing price of the home you’re eyeing. Step 2: Multiply that price by 5 % (or 0.05). Step 3: Compare the result to the yearly rent you’d pay for a similar place.

Example: A condo costs ₹50 lakhs. 5 % of that is ₹2.5 lakhs per year, or about ₹20,800 per month. If comparable rentals run ₹25,000 a month, buying looks attractive. If rentals are only ₹15,000, renting saves you money.

Remember to factor in mortgage interest, property taxes, maintenance, and insurance. Those costs can push the break‑even point higher.

When the Rule Works Best

The 5 percent rule shines in markets where rent and home prices move together, like many U.S. cities or Indian metros. It’s also useful when you’re comparing a single property without getting lost in spreadsheets.

If you’re a first‑time buyer, the rule helps you decide whether to lock in a mortgage now or keep your cash flexible. Investors use it to spot rentals that might generate a solid cash flow.

But the rule falls short when you have a low‑down payment, a high‑interest mortgage, or plans to move soon. In those cases, run a full cash‑flow analysis.

Bottom line: treat the 5 percent rule as a quick sanity check. If the numbers line up, dig deeper; if not, keep looking.