Renting vs Buying

There is a lot of press lately about renting vs buying, and I have my own opinions on the subject to be sure. Let me first tell you that I am renting myself, but this blog post will be completely unbiased one way or the other. The main point will to be to illustrate how difficult it can be to make a financial decision that has outside factors influencing the decision. I am talking about emotion.

Emotion is wonderful; there would be little point to life if we did not have emotion. You buy a house perhaps because you want to feel as though you own something that no one can take away from you, or you simply want something that is unique to you. Apartments can be that way, but it is difficult to personalize a place that you see as temporary, or a place that you are at for a long time but have to abide by your landlord's rules. So I fully understand why people buy homes, and I myself would like to be in that position soon, but I live in a very expensive area (west suburban Chicago) and would like to buy in a less expensive area someday.

If your emotions tell you to buy rather than rent, then carefully consider the amount of money it will cost to buy. Most people know they will have a mortgage, but they don't always consider how much the taxes will be, insurance, PMI (private mortgage insurance, usually required for loans with less than 20% down, although there are exceptions) and the big one, maintenance costs. You may have these initially, or eventually, but they are a real cost that is hard to predict but easy to forget about.

Here is a real life example:

Rent: 1275/month for a 2 bedroom, 2 bath unit, 5 years old
Buy: Something similar in my area, a newer place 2 bed/2 bath goes for about 200-250k. So on the low end...

Principal/Interest: @ 6% for 30 years about 1200/month
Taxes: typically around 2% of home value so about 333/month
Insurance: I'd say about 50/month
Maintenance: If this is a condo/townhome, figure at least 100/month for association dues which covers most of the maintenance
PMI: Can run upwards of 200/month, we'll use 200/month for now

So in summary...
Rent: 1275/month
Buying: 1883/month, about a 600 difference

Does this mean I should buy? Well, maybe I should. But I prefer to invest the 600 in stocks and other investments. My risk tolerance is high, but yours may not be. Should you rent or buy? My friends, the decision is solely up to you, but the finance part is easy and doesn't mislead. Eventually, the rent will rise and exceed the buying cost, so if you're holding period is in the decades, you may be better off buying. Just be honest with yourself, and remember to make some of your money work for you, whether in a home, stocks, or a savings account. Any sort of plan is better than none at all.