The 5% rule compares the monthly cost of owning a home vs renting which estimates the three costs homeowners face that renters don’t. Property tax is assumed to be 1% of the value of the property, maintenance costs are also assumed to be 1%, and the cost of capital (mortgage and the deposit) is assumed to be 3% of the value of the home.
You multiply the value of your home by 5% and then divide by 12. The result is the breakeven point, where renting is financially equivalent to buying. If you can rent a home for less than the breakeven point, you’re better off renting. If it would cost you more than the breakeven point to rent a comparable home, you would be better off buying.