Should You Rent Or Buy?

The age old question in real estate is whether you should rent a home or buy a home for yourself. There are many arguments for each option. The truth is it comes down to what is best for the individual person. There isn't really a right or wrong answer, just like most things in personal finance. There is a rule of thumb many financial professionals use to determine the opportunity cost to buying over renting. This is known as the 5% rule.

This rule takes into consideration what is known as the unrecoverable costs of housing. In the case of renting if your rent is $1000 per month, this is all unrecoverable. You will not receive this back or have any equity from your payments. This is also the full extent to your costs. You don't have to pay for repairs, insurance, or taxes. This is cut and dry when determining the total costs to renting a house in Pittsburgh.

When buying a house in Pittsburgh the costs include other variables. As opposed to just paying a fixed rent amount each month, you must consider taxes, repair costs, and insurance. Also, there is a downpayment required to buy a home. Putting 10-20% down on a home is quite common. This money is now invested into a home as opposed to being invested actually collecting income or growth. This is what's called opportunity cost. Investing that sum into the market on average would have produced around 8.9% if you take the average since the stock market began collecting this data. The benefit is of course the ownership of the home and the mortgage payments going towards paying down that loan and building more equity. You must also consider the interest rate you pay the lender as an additional unrecoverable cost.

Once we've put all these figures together to account for missed opportunities, interest expenses, and other unrecoverable costs, economists conclude that 5% of the purchase price is comparable to a fair monthly rent. What we mean is if you are buying a house in Pittsburgh, take that purchase price and multiply by 5%. Divide that figure by 12 for the monthly payment. If this number is higher than your current rent, it makes financial sense to continue renting, if it is lower, then you have the green light to buy.

Purchase price $250,000

5%

=$12,500

/12

=$1,042 per month

If rent is higher than this figure, studies show it would be a good decision to buy.

This of course is just a rule of thumb. When it comes to a big decision like this it is important to run through all the numbers with your financial advisor . At the end of the day whatever makes you happy and feels comfortable with your personal finances, it's usually the correct decision.