Rent vs. Own

It is a no brainer

Let us take my example. I was living in a two bed room apartment in 1993 paying $600 rent. I paid in my first year $7200 dollars as my rent. I bought my house in 1994 for $100,000. My monthly expense for the house (including mortgage payment, tax and home insurance) was $640. My annual expense was $7680. (It will be less because I won't be paying taxes on part of the mortgage payment, but never mind.)

I was spending $40 more per month but I was living in a 4 bedroom house with a spacious basement and a gorgeous backyard. The downside was that I had to plow the snow in winter and mow the lawn in summer.

But after 10 years I ended by paying $4800 more than if I had stayed on in my apartment. And there were other expenses: changing windows, replacing the water heater, repairing the furnace, changing the carpets in the dining room, etc. I must have spent $20,000 for home improvement projects. In the final tally, I ended up spending $25,000 more.

If I had invested $25,000 in some fast-growth stocks I could have been rich by now (or if I had invested it in some dot-com stock, I could have lost it all!).

Today I can easily sell my house for $150,000. I will end up paying realtor commission and other taxes and most likely I will make a neat profit of $35,000. It is a net profit of $10,000 in ten years. Doesn't seem much, does it?

But I am forgetting something. I saved $72,000 that I would have paid as rent in ten years. So my net profit is really $82,000. Could I have invested $25,000 and see it grow to $82,000? I doubt it.

So it makes perfect financial sense to own a house than rent it.

When does it make perfect sense to rent?

I lived in my home for 10 years. What if I had to sell my home in 1996, a year after the purchase? If I were lucky I would have been able to sell it $5000 above my purchase price. Deduct realtor commission and taxes and I end up losing nearly $5,000.

So if you are not sure you will be living in your new house at least for 4-5 years, there is a good chance that you will lose money when you sell it. So renting may be a better financial decision.

You also have to ask yourself if you can take on additional debt. When lenders evaluate you for a mortgage, they prefer that no more than 40% of your gross income go toward paying off debt. If the mortgage payment alone would account for 30%, that means payments for student loans, credit cards and car loans shouldn't add up to more than 10% of your gross income.

• Check out the rent vs. own calculator from Yahoo.com
• Or another rent vs buy calculator