5 Rule Real Estate: How the 5% Rule Helps You Decide to Rent or Buy

Ever wonder if buying a home will actually save you money compared to renting? The 5% rule is a simple calculator that lets you see the true cost difference in a few seconds. It’s not a magic formula, but it gives you a solid starting point before you sign a lease or a mortgage.

What the 5% Rule Actually Is

Take the purchase price of a home and multiply it by 5%. The result is the amount you should aim to earn each year from that house to make buying worthwhile. In practice, you compare that number to the annual rent you’d pay for a similar property. If the rent is lower, renting might be the smarter move right now. If the 5% figure is lower, buying could be the better financial choice.

For example, a $300,000 house gives you a 5% target of $15,000 per year. If a comparable rental costs $12,000 a year, buying looks attractive because you’re effectively paying less than the rule’s benchmark. The rule also reminds you to factor in taxes, insurance, and maintenance—those costs push the true number higher.

How to Use the Rule in Real Life

1. **Know the price** – Look up the listing price of the home you like.
2. **Do the math** – Multiply that price by 0.05.
3. **Gather rent data** – Find the average rent for a similar apartment in the same neighborhood.
4. **Compare** – If the rent is higher than the 5% result, buying may save you money; if it’s lower, keep renting.

Most buyers forget to add property‑tax rates and insurance premiums. In many states, property tax alone can be 1–2% of the home’s value each year. Add another 0.5% for insurance and 1% for routine maintenance, and the real cost climbs to around 7–8% of the purchase price. That’s why many experts suggest using a 7% rule for a more realistic picture.

Another quick tip: If you plan to move within five years, the 5% rule loses punch because you won’t reap enough equity to offset transaction costs. In short‑term scenarios, renting often wins.

Remember, the rule is a shortcut, not a substitute for a full financial analysis. It doesn’t account for appreciation, tax deductions on mortgage interest, or the emotional value of owning. But as a first‑look filter, it saves you time and keeps you from chasing houses that don’t make sense financially.

So next time you spot a listing, grab a calculator, apply the 5% rule, and see if the numbers line up with your budget and life plans. It’s a fast, no‑nonsense way to keep your housing decisions grounded in reality.