Understanding the 5% Rule Of Real Estate

I’m familiar with many “rules” when it comes to investing, which are better described as rough guidelines. Then again, they say rules are meant to be broken, but if you ignore them completely, you may find yourself in a tough spot. What rules are there?

There’s the 4% rule as a safe withdrawal rate for a standard retirement. Using the Pareto Principle, you can get 80% of the results with 20% of the work. I was not familiar with the 5% rule discussed today, and I thank Ken Boyd with CPA Accounting Institute for Success for submitting today’s guest post.

Renting vs Buying – How Do You Decide?

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Unless you are familiar with the real estate market, home prices, and the real costs home buying involves, you will likely benefit from the help of a real estate agent, financial advisor, and maybe even a tax specialist. These are highly-trained professionals who understand the renting versus buying dilemma and can offer valuable insight into the process.

#1: Hire a Professional (or several)

After all, in order to become a successful real estate agent, one needs to go through specialty classes, take a real estate exam, and work with a broker for several years. In doing so, real estate agents gain knowledge and experience in the field so they can help you choose the best option for your resources and make a decision based on reason, not emotions.

When you take out the emotional factor, the rent vs buy decision becomes a complex mathematics problem. In short, if you compare the cost of renting with the cost of buying, you should know which one makes more sense from a financial point of view.

#2: Understand the Math

However, if it’s easy to understand your costs when renting (the monthly rent and, probably, renter’s insurance), the situation changes when calculating the monthly costs of owning a home. If we oversimplify the equation, we end up with three main cost categories for homeowners:

– Cost of capital (broken into the cost of debt and the cost of equity) – Maintenance (covers a wide range of expenses) – Property tax (a tax you pay to own the home in a specific area) All these cost categories can be easily explained and expanded under the 5% rule.

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