Pros and cons for both, but colo is cheaper, most of the time. One nice feature of renting a dedicated server is being able to rely upon the provider to handle hardware failures. There's never a good time for hardware malfunction, but typically recovery time is a lot quicker when the server is rented, because the data center should have spare hardware on hand, whereas with colo, you may be in a bind for certain issues.
Once you have a half-rack to a whole rack, colo becomes exponentially more appealing, as your per-slot pricing reduces, and you're typically better prepared for the aforementioned situations.
Buying new hardware can be very expensive as a smaller host, though. The data centers are able to leverage their relationships with hardware providers and often pay as much as 50% less than purchasing hardware for a single server. Lots to consider.
