Is the five-year homebuying rule still relevant?

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How many years should you stay in your new house? How does it make any difference whether you choose to stay for a year or a decade?

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People don't always buy homes for staying in them; especially if their purpose is real estate investment or earning rental income from the property. However, experts advise that those who do purchase a home for living in it, follow the five-year rule.

The five-year rule states that homeowners should stay in a house for at least five years before selling it to avoid taking a financial hit and making better profits.

The five-year rule isn't a hard and fast rule, but it can save you from making financial losses. Your property's value should appreciate enough to cover the closing costs and other expenses that you incur in the buying/selling process. Since real estate appreciates slowly, the longer you keep the house, the more money you make by selling it.

Here are two reasons why the home buying five-year rule is still relevant.

Closing costs can hit you hard

When you buy a home, you pay the maximum amount as the purchase price, but closing costs can add up to significantly affect your choices and decisions. When buying a house, the average closing costs come out to be about two to five per cent of the property's purchase price. And move up to seven per cent if you are selling your house. You would want to recover this amount at the time of selling your property.

Some things that you need to consider in making a buy/sell decision are:

• Moving out of the house before selling it: You will continue to pay your mortgage, taxes, electricity, and water bills. These expenses are going to cut down your profits.
• Prepayment of mortgage: Many lenders still attach a prepayment penalty clause to your mortgage, which means that they shall levy a fine if you repay the loan before five years.
• Lawyer's fees: Every time you get into a real estate transaction, you hire real estate lawyers and pay considerable fees to them.
• Real estate agent's commission: Whether you buy or sell a house, you need an agent to help you close the best deal. The agents usually charge some percentage of your purchase/sale price as their commission.
• Other fixed expenses: You pay the charges for title search, notary, transportation, home inspection, insurance, lender fees, and many more.

The longer you stay in a house, these closing costs even out as monthly costs of ownership and the property appreciation outweigh these expenses at the time of sales.

The interest payments don't allow you to build enough equity.

A significant portion of your earnings goes out as mortgage interest payments for the first few years. This added outflow from your income slows down your equity building. Of course, your house is a part of your equity. But, for the first five years, the amount that you shell out in the form of interest is much more than the amount by which your property appreciates.

After five years, as your principal goes down, your interest goes down, allowing you to make more payments towards your principal.

Nevertheless, if you have to move out within those five years before making enough equity, renting out your house can be a good option for covering the costs.

Do you have to stick to the five-year rule?

The rule is for the greater good of the home buyers. But if you add other factors to it, you can buy a house where you don't want to stay that long. Here are ways you can bypass the five-year rule:

• You can save on interest payment if you choose to pay an extra amount over and above your mortgage installments every month. The more you contribute towards your principle, the lower your interest goes.
• You can build sweat equity by purchasing an unfurnished house and doing the improvements yourself. By doing so, you can save the contractor's cost and increase the property value sooner than five years. However, you need the required skills and knowledge of real estate for this job.
• If you bought your house in the falling market, you might see your property value increasing fast in the rising market within two or three years. Considering the volatility of the real estate markets, you must invest cautiously after analyzing the market conditions.
• You can earn rental income from your house while maintaining the ownership and move to another home. Many house owners choose to rent their property when moving out of it.

Some people you know may have got lucky in a year or two and made profits by selling their house. There can be many factors resulting in a sudden surge in the real estate price. For example, if a new metro station comes up near your house, it will increase its demand, leading to a price rise. Or if the house is in an area that shows promising economic growth, the property price there will rise quickly. That is why real estate experts emphasize the importance of the resale value of a property. They advise calculating the resale value of a house before planning to buy it.

However, real estate prices don't appreciate that quick. If you can wait at least five years, you increase your chances of better returns.

Also, real estate investments are financially risky. If you can only buy a house as per the lender's estimation of your affordability, and you do not want to put it on rent, it is advised not to purchase the property until you are ready to stay in it for at least five years.

Moreover, it is always a good idea to consult an expert realtor and real estate lawyer before buying and selling a home.