LIVE: The 5% Rule

Many people are wondering about the pros and cons of renting an apartment versus buying their own home. In the Philippines, most Filipinos resort to renting an apartment because they can have a unit and a roof to live in to pay less upfront. But inexpensive as it may seem, renting a house can cost you more as rental fees continue to increase over time.

This is why people nowadays are being torn if they should choose to buy a house and lot instead of continuing to rent an apartment. But before you make decisions whether to rent or own a home, it’s essential to consider first your budget and if you need to stretch out your finances.

It would be best to keep in mind that owning a home is a financial commitment, so you need to consider everything, plan, and figure out your future goals.

Indeed, you can easily afford to own a house if you are only considering the mortgage payment, but there are a lot of housing costs more than that.

This is the reason why there is what you call the 5% Rule in real estate. With this, individuals who are considering buying their own house and lot can figure out more quickly and calculate the probable expenses when they resort to home investment.

Knowing the 5% Rule in Real Estate

In assessing the advantages and disadvantages of buying or renting a home, we must first know how to determine the value of the Unrecoverable Costs for each situation. In layman’s terms, Unrecoverable Costs are the payments you’ve made in exchange for having a place to live.

So, in assessing buying or renting a house and lot, comparing the Total Unrecoverable Cost of Renting and the Total Unrecoverable Cost of Owning is essential. Sound complicated, right? No worries, we got you! And this is the reason why we have the 5% Rule.

Total Unrecoverable Cost of Renting

Let’s tackle first how to get the Total Unrecoverable Cost of Renting by taking this example:

You are renting an apartment and paying its rental fee of Php 5,000 every month. To get the Total Unrecoverable Cost for your rent, you must multiply your rental fee by 12 months and divide the answer by 5%.

For example: 5, 000 x 12 = 60, 000

60, 000 / 5% = 1, 200, 000

This means your Total Unrecoverable Cost for Renting every year is Php 1.2 million.

Total Unrecoverable Cost of Buying a Home

Now, let’s check on how to compute the Total Unrecoverable Cost when you buy a house and lot through this example:

You would like to buy a house and lot unit from Lumina Homes for a total contract price of Php 605,000. Multiply this amount to 5%, then divide its answer to 12 months.

For example: 605, 000 x 5% = 30, 250

30, 250 / 12 = 2, 521

In this case, the Total Unrecoverable Cost of the house and lot you bought from Lumina Homes is only Php 2,521 every month.

Based on these 5% Rule calculations, you can say that buying a house and lot unit is like renting a home with the mortgage payment. Although this might seem like a better number than renting an apartment, you should know that this amount doesn’t include the total costs for home investment yet.

Note that in buying a house and lot, mortgage payments are not entirely the Actual Unrecoverable Costs.

Homeowners Actual Unrecoverable Costs

For you to know the actual expenses or Actual Unrecoverable Costs in owning a house and lot, you need to identify first the costs of these three surcharges:

1. Property Tax

This is the taxable value of the property in the fair market value. The minimum rate for this, especially in the provinces, is 1% of the value of your home.

2. Maintenance Cost

Just like the Property Tax, Maintenance Cost is also assumed as the 1% value of your house and lot. This type of expense includes the renovations or remodeling that you want to make to your new home.

3. Cost of Capital

This one is a bit bigger as it is estimated to be 3% of the value of your home. When you buy a house and lot, it’s pretty standard that you would need to pay a down payment for it in cash. In a rough estimate, it is around 10% to 20% value of the house and lot you bought, which means you will need to subsidize the 80% to 90% mortgage of your home.

This down payment you made is the Cost of Equity of your house, while the mortgage is the Cost of Debt for your new home. Adding the two together will make up the total value of your house and lot.

Cost of Capital = Cost of Debt + Cost of Equity

Benefits of Home Investment

Now that we were able to compare the costs and expenses of renting an apartment and buying a house and lot you can call your own, it’s time for us to list the advantages of home investment.

1. Through the calculations and comparison that we made earlier, we determined that it’s way better to buy a house and lot unit because the Unrecoverable Cost is much lesser than renting.
2. Another great thing about it is when you have your own space, you have complete control of your household, while renters commonly can’t have this kind of advantage.
3. You can also have more space for the family and the freedom to design your area and do whatever you want with your home without being bothered or receiving any complaints from your neighbor or landlord.
4. Think of it as a business investment. You can easily rent out the rooms in your home to earn extra income and budget to pay your mortgage, which you cannot do when renting an apartment.

So, start investing now while you are young, as this will always be an intelligent decision. Get your Bahay Goals now and be a Homeowner achiever with Lumina Homes!

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For more information about the affordable house and lot for sale in Iloilo of Lumina Homes, please contact (0917) 629 6523.

Visit our official website at www.lumina.com.ph and like/follow our official online channels: Facebook, Twitter, Instagram, YouTube, Google MyBusiness & Google Maps, Pinterest, Spotify, Viber, Telegram, Lazada, and Shopee.