Source: Point 2 Homes—
The 5% rule was coined by Canadian investment portfolio manager Ben Felix. It stems from the general consensus among potential homebuyers that if you can afford to make mortgage payments that are equal or less than what you’re paying in rent, then buying is a better alternative. However, the 5% rule puts the buying vs. renting dilemma in a different light by factoring in the unrecoverable costs that occur in both cases.
What are unrecoverable costs? If you’re renting, they’re self-explanatory: your monthly rent is an unrecoverable cost. The money spent does provide you with a place to live, but it won’t help you own an asset as homeownership does. Also, the cases in which it can be used to improve your credit score are still rare, and they largely depend on whether your landlord will report those payments to a credit bureau.