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Are you ready to embark on the journey of owning your dream home? Before you dive into exploring the myriad types of homes, their advantages, and price ranges, let’s take a moment to consider an alternative option: renting.
Choosing between renting and owning requires careful thought and thorough examination of various factors. It’s crucial to arm yourself with key information before making such a significant decision. So, what key factors should you keep in mind?
In this article, I’ll explain the helpful “5% rule” and how you can use it to decide whether it is more financially advantageous to rent or own your home.
An Overview of the 5% Rule
The 5% rule is a simple “back of napkin” guideline that can assist you in assessing whether it might make better financial sense to own your home versus rent a comparable place. By comparing the costs of homeownership with the costs of renting, you can gauge which option aligns better with your financial goals.
Here’s how you can utilize the 5% rule:
First, take the total value of the property that you would like to buy and multiply it by 5%. Next, divide that number by 12 to get a monthly amount.
For example, if you’d like to buy a $400,000 home, simply multiply that number by 5% and then divide it by 12. In this example, that would be:
$400,000 * 0.05 = $20,000 / 12 = $1,667
If that final number ($1,667) is less than what you would pay per month in rent, then the 5% rule suggests that it might be a more cost-effective option to own your own home.
However, if you can rent an equivalent place for less than that number (say, for $1,400 per month), then this rule would suggests that it might make better sense to stay a renter instead of becoming a home owner.
Of course, this is a simple rule of thumb and doesn’t take every possible factor into consideration, such as the tax benefits of real estate ownership or the benefits of owning real estate in desirable neighborhoods over long periods of time. It also doesn’t account for the benefits of paying down your mortgage over time, nor does it account for your ability to move out of the property and turn it into a rental if and when you want to do so.
Regardless of these limitations, the upside of the 5% rule is that it can help to make a difficult decision easy.
Money Saving Tips When Renting or Owning
The 5% rule simply states that you should only purchase a home if you can do so for under the costs of renting. While owning a home offers more stability in the long term and potential tax savings, you must also have the financial capacity to handle its mortgages, property taxes, insurance, maintenance, and yard care.
Renting may be a better option if you’re not ready to commit long-term. Renters don’t have to worry about the financial burden of a mortgage and the associated costs. How about renting to own?
Is rent to own a scam? It’s essential to research and be aware of any hidden fees or costs associated with the agreement. It’s wise to research and compare different options to find the best deal when investing in real estate.
Does It Make Better Sense to Rent or Own?
Another key factor to consider when you are deciding to rent or own is to evaluate how long you plan on staying in one place. If you have the money and plan on living in one place for at least five years, then buying a home is often the best option.
However, renting may be the best option if you plan on staying in one place for a shorter period. The decision should be based on your financial goals and plans for the future.
Also, real estate has historically been a solid long-term investment. As mentioned above, homeownership can offer potential financial benefits, especially in areas where property values are likely to appreciate.
Plus, as a homeowners you have the option to generate (mostly) passive income by renting out a portion of your property or listing it on AirBnb during times you may be away. If you really want to get creative, you can also rent out a section of your garage or driveway as a paid parking spot using sites like Spacer.com or Neighbor.com.
The 5% rule is incredibly handy, but it doesn’t account for every possible variable or how you may want to approach your own unique situation.
Which Choice is Best for You?
Put simply, the 5% rule can be a helpful tool when deciding whether to rent or owing a home. This rule helps you to assess the financial benefits of both sides. The decision is then up to you as to which choice will be better for you at a particular point in time.
To explore your options further, explore the real estate section of this blog.