Buying is not always better than renting

DEAR BRUCE: My close friend is engaged to be married and would like to buy a home. They have no plans to start a family. I thought he would be better off, at least at the outset, to rent. His response: "He would be throwing money away if he rented; buying made more financial sense." I know you have said otherwise many times. Can you give me some reasons to pass on to him? — H.J. in Ohio

DEAR H.J.: There was a time when real estate went in one direction: up. It made sense to buy, purely from the point of view of finance. Certainly in many areas, real estate is appreciating, but in others it is depreciating. Generally speaking, the same home you might consider purchasing could be leased for less net cost than the cost of purchase, factoring in taxes and other variables. If this is the case for your friend, as it is in most circumstances, and he invested the difference of what he would pay in rent and other expenses (taxes, insurance and upkeep) each month, he would find that, at the end of five or 10 years, he would be worth more (taking his investments into account) than he would be if he were paying down a mortgage.

DEAR BRUCE: I know you have said this in the past, but I cannot find the article. You referred to the reason that you believe a car should only be financed for three years, and if you can't afford to buy it during this period of time, you can't afford it. Could you re-address this? — L.D., via e-mail

DEAR L.D.: Simply put, an automobile is a depreciating asset. If it is financed for more than three years (new-car purchase), you will be "upside down," which means you will owe more than the car is worth for an extended period of time. Not a happy position to be in.

Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: Questions of general interest will be answered in future columns.

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