We get asked a lot about owning vs. renting a home. This is especially true of clients who are looking at the third stage of their lives rather than their first or second.

There are good emotional reasons to own: You may feel more connected to your community, there often is a pride of ownership, you have a sense of stability.

There are also good emotional reasons to rent: You have more flexibility, you feel less pressure to keep up with the neighbors, you have fewer expensive big surprises.

But financial reasons for owning vs. renting can prove a bit more elusive. Virtually every client who wants to sell their home and explore renting underestimates how much rent they could pay to match what owning actually costs.

Let's look at a married couple buying a $500,000 home on which they have put 20% down and have a 3.5% 30-year mortgage. Let's also assume their property taxes are 1% (or $5,000) a year and insurance costs are another $138 per month. Monthly costs are now $2,400.

In the past, we used to get significant tax advantages from owning because of the mortgage and property tax deductions. In the situation above, though, not considering charity and depending on state income tax, the mortgage interest may not get above the standard deduction to which everyone is entitled (a single person would get to itemize). The tax benefits for home ownership then rest solely on the capital gains exclusion when the home is sold, presuming the owner makes money on it.

So it looks like one could rent for $2,400 a month and be in the same financial position, right? Not even close.

First, the $100,000 used for a down payment could instead be invested which would generate some expected, but not guaranteed, return. If the down payment money earns 5%, the home "costs" $5,000 a year compounding (the interest on interest keeps growing). When you own a home, appreciation can occur on the entire home, not just the down payment, but so does the friction (costs of selling) when you eventually sell. So for our purposes, the $5,000 of opportunity cost can increase the rental by more than $400 a month.

In a perfect world, we never have anything we have to do to a home, but nobody's world is perfect. Therefore, we have to consider an annual maintenance amount for the things that need to be replaced and the things that just need to be maintained.

Is 1% of the home value too low? That would be another $5,000 a year or $400 a month. Depending on the age and quality of the house, this number could be much higher (for our clients, we often use a 2% number). We are now up to an equivalent rental of over $3,200 a month.

Whew. Is that it? Nope.

There is a certain amount of upkeep in owning a home. Sometimes owners choose to do this themselves because they enjoy it or want to save money, but they are discounting the value of their time. If they spend four hours a month mowing and shoveling, then that is 48 hours a year, equating to about a week of their regular job. Multiply their salary by 2% and that is the personal cost for these chores.

The average amount of income needed to own a home in Minnesota is over $70,000 a year. And 2% of that is over $100 a month. We are now up to $3,300 a month before we start to buy all the possessions that make a home a home. While people also buy things for their apartment, my suspicion is that they won't be upgraded as often.

Costs can certainly go up with renting, especially if the rental market becomes tighter. Since the mortgage is generally fixed, the largest part of the home ownership monthly costs don't go up. On the other hand, the longer one owns a home, the higher the upkeep and maintenance costs are — and property taxes also continue to go up.

In other words, using the example above, one could spend over 30% more on rent than what they are paying in principal, interest, taxes and insurance to be in the same position as owning. If you don't spend as much on rent and invest the savings, that could compare with the appreciation after expenses you may get on a home sale.

Having a better understanding of the true costs of home ownership will help you come to a better decision on owning vs. renting.