## What Is The 5% Rule In Real Estate?

The 5% rule in real estate is a rational approach to figuring out if you are better off renting vs. buying a home at a particular time. Here is a simple explanation of the five percent rule. Multiply the value of the home, for example, the home is priced at \$450,000, take that number, \$450,000, times 5%. That number in my example would be \$22,500. Lastly divide that number, \$22,500 by 12. The number that you will have for this example would be \$1,875. Consider this the break even point. If the monthly rent on a comparable home that you would want to live in is below that number (\$1,875 in this example) it makes sense to continue to rent. If the monthly rent is higher than this number it makes sense to buy.

## To Rent Or To Buy?

The five percent rule takes the emotion out of the decision of rent vs. buy and gives you hard numbers to think about. The cost of renting a home is simple. It is the amount that you pay in rent. The cost of owning a home is more complicated. You have to consider the maintenance costs the property taxes and these costs are assumed in this five percent rule. Moreover, they are using the number of one percent of the value of the home goes for taxes and maintenance. With this you arrive at a rational decision to buy or rent.

This formula does not take into account if you are in a financial position to buy a home. Moreover, it also does not take into account additional benefits to buying a home. You can deduct some or all of the interest that you pay on your mortgage from your taxes. That alone will push the the math to favor owning over renting. Moreover, this formula also does not take into account the wealth that you will build through appreciation of your asset, your home.

## The 5% Rule In Real Estate: We Are Here If You Need Help

The decision about whether you should continue to rent or buy a home cannot be made completely based on the The 5% Rule In Real Estate nor can it be a completely emotional decision. Explore what is best for you. Additionally, ask professionals that you trust questions to get the answers that you need to make an informed decision. Contact us for more assistance.

## Waiting for the Real Estate Market to Cool Off?

Are you waiting for the real estate market to cool off? We have discussed in the past it is unlikely that there will be a market crash like the 2008/09 housing crisis. There is still a chance that at some point the market will shift. This could be from a sellers market to a buyers market or even a balanced market.

## Sitting, Waiting, Wishing

You might be wondering if you should wait for the real estate market to cool off before purchasing. This is a fair question and one that we get fairly often. Unfortunately, even if the market cools over the course of the next few years, it still may mean housing costs are just as high. Let us illustrate this point with some math if you will bear with us.

## Do The Math

So are there any benefits to waiting for the real estate market to cool off? Let’s say that you can purchase a home today for \$400,000 with a 3% interest rate, this would make your monthly payment roughly \$1,686 per month. This is when you factor in a rough estimate for property taxes and insurance. Now let’s say that the market takes a nose dive. With your crystal ball you wait and buy that same house in a year or two. Now that house sells for \$350,000 but with interest rates climbing your rate is now 4.75%. This would make your monthly payment \$1,826 (allowing for the same estimate for taxes and insurance). You are still paying \$140 more per month on the same property. Even though the value of the property has gone down.

In this scenario it is also important to note how unlikely that situation is to occur. In Fort Collins during the housing crisis, home prices dropped less that 1%. On a \$400,000 home this would equate to it being worth \$396,000. In the above example the home decreasing in value at that rate equates to a price drop of 12.5%.

## Waiting Doesn’t Work

The simple thought experiment above demonstrates that waiting for a hypothetical market shift does not result in any real cost savings for you. If home valuation trends continue you will have lost out on thousands of dollars of appreciation waiting for a day that may never come. So, if you have been on the fence about beginning your home search contact us and we can help you get started today.

## Record Low Mortgage Rates

This week the rate for 30 year fixed mortgage hit an all time record low mortgage rates since data for this rate began being tracked in 1971. According to Forbes, the 30 year fixed rate reached a low of 3.07% and the 15 year 2.56%. This represents a great opportunity to either purchase a home. Or to get locked in to these never before seen low rates, or to refinance your existing home mortgage. In either case we can put you in touch with a great local lender. If you are looking to refinance we can provide you with comparable sales. This helps to insure that you are able to appraise for the highest value.

If you purchased a home with less than 20% down you likely have mortgage insurance however you may have 20% equity in the home at this point. You could refinance your mortgage, remove your PMI and have a lower interest rate. What could you do with a couple hundred extra dollars in your pocket each month, or the thousands of dollars you will save over the life of your loan? There is what you need to know about record low mortgage rates. As always, we are here, contact us and let us know how we can help you.

## Quick Finance Facts

Here are a few quick finance facts about the average financial situation of Americans nationwide:

• 33% of Americans have \$0 saved for retirement. – CNBC
• 69% of Americans have less than \$1000 in their bank account. – The Motley Fool
• 78% of American workers live paycheck to paycheck. – Forbes
• On average a smoker will spend \$1-2 Million on cigarettes in a lifetime. – Money
• The average American household has \$137,063 worth of debt. – Debt
• Home ownership in the U.S. is at a 50 year low to 63.1%. – Forbes
• 87% of surveyed Americans say that home ownership is still part of the American Dream. – Benchmark
• In 2013 the average homeowners net worth is \$195,400, while the average renters was \$5,400. – Forbes
• The median sales price of a home in Fort Collins in May was 3.3% higher than it was during the same time last year. – IRES MLS Market Data

We hope you enjoyed those quick finance facts. When you consider all of this, it makes sense that buying a home is one of the best financial decisions that you can make. Every mortgage payment you make is like paying into your own personal savings account and at the end of 15-30 years you will have paid off your largest asset. Just think what you are contributing to rent each month. If one continues to rent by the end of that same 15-30 years this amount will have increased exponentially, but as a homeowner you will be free of monthly payments to a landlord and will instead be paying yourself. Contact us today and let’s work together to start the process and find you the home of your dreams.