When it comes to buying a home, the 5% rule is a useful tool to keep in mind. It forces you to consider all costs, including the opportunity cost of purchasing real estate. While it may appear overly simplistic, it can have a clear outcome in overpriced housing markets. In Toronto, for example, a $500,000 home requires a 20% down payment. Otherwise, you would be paying an average mortgage of $800,000 and would be unable to afford the house.
For decades, the 5% rule has been a useful tool in real estate investing, but it is not always applicable. Many real estate agents, particularly those who specialise in real estate, overcharge investors. It is also possible to earn more than 5% in brokerage, but this is uncommon. This is due to a variety of factors that may make the property less appealing to prospective investors. For example, if a home is listed at a higher price than the ARV, you have a better chance of renting it out.
The 5% rule can also be useful in determining the worth of rent. For example, if your monthly mortgage payment is $2,000, you should expect to receive $2,200 in rent each month. Using this rule, you can determine whether the profit will cover the costs of maintaining the property and paying off the mortgage. If your monthly rental income is only $100, it may not be worth it because it will be a lot of work. However, having a solid plan and investing wisely can help to ensure a successful real estate investment.
While the 5% rule is useful in many situations, there are numerous other factors to consider. Renting a home may be less expensive than buying one, depending on your lifestyle and location. However, your long-term plans should also be considered. A 5% rule may not be the best option for you if you want to invest in real estate. In that case, your long-term strategy should have an equal bearing on your decision.