Ever wonder if there's a shortcut to figuring out if a property is worth buying or if you'd be better off renting? Plenty of clever investors and first-time buyers in Australia—and around the world—have faced this struggle. That's where the so-called "5 rule" or "5% rule" steps in. It's not some magic formula that solves everything, but when you break it down, it’s surprisingly practical. Far too many people jump into real estate based on gut feeling, or because their mate at a barbecue said to. The 5% rule gives you a quick gut-check with real numbers so you don’t end up with buyer’s regret. Let's dig into what it is, why it matters, and how you can actually use it to give yourself the edge in property decisions.
What Is the 5 Rule in Real Estate? Decoding the Formula
At its core, the 5% rule creates a comparison baseline for renting versus buying a property. The idea started gaining traction when financial planner Ben Felix publicly unpacked it on YouTube a while back. It boils down to this: If the annual cost of owning a home—including interest, taxes, maintenance, and opportunity cost—exceeds 5% of the property's value, it might make more sense to rent than to buy. For a $600,000 flat in Melbourne, 5% comes to $30,000 a year. So if you estimate all the silent costs of owning (not just your mortgage) and they total over $30,000, then renting that same unit instead could be the smarter choice—not to mention less stressful.
This formula isn't just about comparing your monthly rent to a mortgage payment. It shines a light on all those extra costs that slip through the cracks: council rates, insurance, maintenance call-outs, the risk of price dips, and the money you sink in as your deposit instead of investing elsewhere. Lots of folks get tripped up imagining home ownership is as simple as swapping rent for a mortgage, but the 5% rule slaps you with a reality check. And don’t ignore the chance costs—financial experts love throwing that phrase around, but basically, it means what would happen if you put your deposit into the share market instead? Shares in the ASX200, for example, have historically returned about 8% a year if you keep your nerve through the bumps. That’s the kind of perspective this rule brings, so you’re not blinded by rose-coloured bricks.
This method is more than a fun trick. It’s handy, especially in a city like Melbourne, where median house prices and rental rates can swing wildly. By having a fixed '5%' measure, it stops you from making big commitments based on wild market headlines and keeps your decision grounded in the numbers. And if you’re a property investor, not just a homebuyer, the 5% rule makes sure you’re not sinking money into a rental property that barely covers its cost.
Why the 5% Rule Matters: Real Implications for Buyers and Renters
Most people buying a house—especially Aussies looking for their first pad—don’t realise how much they’ll end up forking out each year just to hold onto those keys. Beyond paying off the bank, there are council rates (which jumped 4.5% on average in Victoria last year), landlord insurance, body corp fees if you own an apartment, and if the plumbing goes kaput? That’s on you. The 5% rule forces you to slap all those hidden numbers on the table. Not only that, but it weighs in what you could have made if you let your deposit work for you somewhere else.
Picture this: Rental prices in inner Melbourne have sped up 7% since last year. But mortgage rates? They shot up, too, hovering above 6% in some cases in early 2025. It's a moving target, but when you slap these on the scales, the 5% rule can show that sometimes renting just isn’t the "throwing money away" everyone makes it sound like. Maybe one year, home ownership is a better deal; a year later, as market rates morph, renting wins out. Think about how this applies to investments: If you’re buying a property to rent out, your total rental income should clear that 5% threshold after all your taxes, maintenance, and vacancy risks, or you’re better off dropping your dollars elsewhere.
Using the 5% rule isn’t just for before you buy, either. Live in your new place for a while? Costs could edge up—rates rises, bigger insurance bills as climate events bump premiums, more maintenance as the building ages. It’s smart to re-run your numbers. Sometimes, the 5% rule makes people question if it’s worth upsizing to a fancier place or taking on a second investment property. If it feels close, even a slight market or rate change could tip the answer.
The Maths Behind the 5% Rule: Crunching the Numbers with Real Costs
Let’s not sugar-coat it—owning property is expensive in ways you usually don’t see coming. The 5% rule starts by giving you a way to tally it all, so you don’t sleepwalk into mistakes. Here’s what to add up:
- Mortgage interest: This isn’t your full repayment, just the interest part. In 2025, a typical 30-year loan at 6% on $600,000 means about $36,000 in the first year, mostly interest.
- Property taxes: Melbourne council rates could be $2000–$3000 a year for most houses, a bit less for apartments but still feels steep when it lands.
- Maintenance and insurance: A sad fact—pipes, paint, wiring, and the hot water system will all break eventually. Experts guess 1%–2% of property value yearly. For $600,000, you’re up for $6000–$12,000 a year—more if you get unlucky.
- Strata/Body corp: Apartments? Add $2000 or more a year. It sneaks into your tally just the same.
- Opportunity cost: Here’s the bit nobody considers. Say you dropped $120,000 as a deposit. If you’d invested that in the share market at 8% annual return, that’s $9600 a year you’re not seeing.
Add all that up: mortgage interest ($36k), council rates ($2.5k), maintenance ($7k), strata ($2k), and opportunity cost ($9.6k). That’s about $57,100 per year—almost 10% of the home’s value! That blows the 5% rule away. If you can rent the same house for $600 a week, that’s $31,200 a year. Suddenly, renting looks like a clever move.
Now, this flips around in some suburbs and market cycles. If rents skyrocket—or if your deposit gives you a much lower mortgage (like 50% deposit, nice one)—the balance changes. The 5% rule just gives you a cold, hard way to score it up. And it’s not perfect, it leaves out some non-financial bits (like pride of ownership, or garden space for the dog). But if you’re purely interested in 5 rule real estate wisdom for dollars and sense, the maths matters.
Using the 5% Rule in Real Life: Step-by-Step Guide for Aussies
Ready to use this yourself? Here’s how you can apply the 5% rule, whether you’re eyeing a family home, an apartment investment, or just tired of arguing with your landlord about dripping taps. No MBAs needed, just a phone calculator and honest numbers.
- Find the value of the property: Use sales records or local agents—don’t rely on outlandish online listings.
- Multiply by 5%: For a $700,000 house, that’s $35,000 a year.
- Tally all the annual ownership costs: Mortgage interest from a repayment schedule, council rates (Google your council), annual insurance and body corp fees from quotes, and add 1%–2% for maintenance. Don’t fudge the numbers.
- Include opportunity cost: Work out the deposit and what it could earn at 7–8% if invested elsewhere.
- Compare the total to the local annual rent: Can you rent for much less? Tick for renters. Cost about the same or cheaper for owning? Thumbs up for owners.
Plenty of online calculators do the sums for you, but it’s smarter to know your own numbers. Sometimes, you can tweak the variables—like make a bigger deposit or buy in a suburb with higher rental yields—so the 5% rule swings in your favour. Even on the investment side, if you’re looking for positive cashflow, look for properties where annual rent after costs comfortably clears that threshold. Investors often call this the "rental yield", and in Melbourne, you’re doing well if gross yield (annual rent as a % of value) cracks 4–5% on houses, a bit higher for apartments if you don’t get hit with crazy fees.
This step-by-step approach doesn’t take away the gut feel or the dream of home ownership. It just gives you a powerful filter. Some people want to own, no matter the maths, for stability or family. That’s fine—just go in eyes wide open.
Tips and Common Pitfalls: Making the 5% Rule Work for You
Bending the numbers to make your choices look good is tempting, especially if you’ve already fallen for the glossy kitchen or Instagram backyard. But the 5% rule is only as useful as your honesty. Underestimate maintenance, or ignore the real insurance bill, and you’re in fantasy land. Here are a few tips that can help you keep things real:
- Don’t skip maintenance: Pipes always break. Roofs leak, especially in Melbourne winters. Plan for it every year, not just when disaster strikes.
- Be honest about opportunity cost: Investing your deposit can really compound over the years. If you ignore it, you’re missing the biggest quiet cost.
- Factor in rent increases: In fast-moving areas, rents can rise quick—especially with supply crunches. But also check for government caps or freezes that may help you as a renter.
- Check market conditions: During property booms, home values can overrun local rental prices, making buying look weak for a while. Wait for cycles where the numbers balance out.
- Remember non-financial perks: Owning can mean freedom to renovate, a backyard for kids or a dog, or just peace of mind from not being booted at lease end. If that matters most, the 5% rule is your guide—not your jail.
Classic mistake? Focusing only on mortgage repayments and ignoring extras. That’s how so many get stung by so-called “hidden” costs. On the other hand, don’t get paralyzed by analysis—markets move, situations change, and nobody gets it perfect. The 5% rule just stacks the odds in your favour, so you don’t get trapped chasing property fads or end up holding a money-draining lemon because everyone else bought in.
So next time you hear someone pontificating about "rent money is dead money" or that buying property is the only smart choice, smile and ask, “What about the 5% rule?” It might just be the secret shortcut that keeps your finances—and your sanity—on track.
