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.

The 5% rule is well-known by real estate specialists and you’ll often hear it mentioned if you plan on buying a house in the near future. 

Understanding the 5% Rule Of Real Estate 

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Now, if property taxes are easy to understand and assess, the situation changes with maintenance costs. That’s because the situation is different from one house to another and labor costs.

Property Taxes & Maintenance Costs

Most people who buy a house need to take up a mortgage in order to cover the full costs. Therefore, they start with a down payment and finance the rest using mortgage payments.

Cost of Capital

Let’s say you are interested in buying a house that costs $300,000. Start by calculating 5% ($15,000) to get a rough estimate of your yearly investment that includes property taxes, maintenance, and cost of capital.

The 5% Rule Applied in Real Life

As useful at it may be, the 5% rule needs to be applied with caution and the results are more like guidelines. Still, it sets the right framework and allows you to consider all the costs.

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