Buying Vs. Renting Vs. Leasing

[Srrh]

First of all, let me state that I SUCK with money. I am always broke  ;D

Buying, renting, leasing....
What are the advantages of those things ?
I never understood the concept of a lease....

When you buy, you increase your net worth, no?...why would anybody do anything else?
Does it make more sense not to buy when technology for exemple, will force you to replace your gear often? But then why lease?

Srrh !

[Henrik]

Srrh,

That is an interesting topic, and I will try to provide some kind of answer. This will no doubt not be the right answer, but it is mine!

First of all, I always believe in buying. As fo renting, there is something about paying money for an object, and then after a period of time I have nothing i.e. I must return the object as the rental agreement has expired, that bothers me. Sure, in some cases it makes sense, such as renting a car for short periods of time. Also, when it comes to property, there is often no other solution as buying a house or an apartment is simply too expensive. Mind you, that’s where mortgages come in, but I’ll leave that for another time.

So, we have established that buying is what makes the most sense to me, and that renting may be a good thing at times, so then, what about leasing?

I have to admit that I never really understood leasing. I suppose it does have a value in the sense that you can lease an object, say a car, and establish fixed monthly payments. This allows you to have a set monthly budget, enabling you to better manage your finances. The leasing contract often includes service charges etc. and when the contract expires, you replace the car with a new one, and simply set up a new lease contract. Thus you have a reasonably new car at all times, your service charges are covered, and you have a fixed monthly cost. What bothers me is that you are simply paying, and have nothing to show for it at the end.

As an example, when setting up the bank I currently work for, I was approached by a leasing company to draw up a leasing contract for all our computer hardware needs. The deal was that I would pay a set monthly fee, allowing for a simplified budget, and we could determine a 2 year life span on PCs. Thus after two years, I would get new PCs, and the leasing company would take the old ones. However, the total cost over two years was equal to buying all the equipment, plus two years interest! So, instead I bought all the equipment cash, then set it up in the accounting so that I would charge a monthly cost over two years by depreciating the equipment value. Thus, after two years, I had smaller monthly costs than the lease contract, and I still had the equipment. Granted, the equipment is two years old, but most of it still works well. So, now as I begin to replace the PCs, partly to have updated stuff in the office, and partly to maintain my budget costs on a constant level, I am freeing up two year old PCs. So, I use some of them as back-ups, some for testing things, and the others I am giving away to the staff as a present. Later I'll probably donate others to schools or developing countries.

So, in this example, you can see that leasing makes no sense.

[hearing_aide]

Leasing!

Ya, I don't have a clue either.

I know here you can get  a much nicer car by leasing (accord -vs- BMW 5 series) then buying. Of course if you can't afford to buy it you shouldn't probably lease it.

I have always heard that it makes sense for companies to lease, something about you can deduct more from your taxes. But I don't know.

There is an ad in the paper for a 5 series:

6000.00 Down 399.00p/m for 39 months thats $15561.00, that makes the total $21,561.00

I don't get it. You spend 21K and end up with nothing. I feel like someone is trying to sell me "muffler bearings".

If you bought the car and it cost 35k to begin with and you pay 21K, but at the end of 3 years 3 mos. a BMW will still be worth more then the 14K left on the loan. I t will most likely be worth 21K. So you sell it for 21K, pay off the loan and end up with 7K. Why would you lease?

My office manager just told me if a company in California buys a car, when they sell it they must sell it for Low Blue book, she doesn't know why. Neither do I.

There must be a reason I missing....well I can think of one....because car dealers and banks can make more money off of unsuspecting people. It almost sounds like Loan Sharking! NOT LOL.

any help?

H8

[DeadCat]

Hmm, not an easy one to tackle….

Each one has its own advantages for each different financial situation…

I suppose it all dumbs down to the ROI (return on investment) for the product or commodity being purchased as well as tax advantages given your present tax situation…

Example A: (corporate)

Basic rule of thumb is that if you can afford to buy it outright, do so, depreciation is awesome on business tax returns in this country. (Property is the main exception here due to the large initial outlay). But essentially a corporation needs to take control of its own finances, but who gives a crap about corporate finance here? Certainly not me.

Example B: (private)

The emphasis must be placed on the ROI, however, you need to find a solution that will reward you both mentally and financially.

For our present situation the good wife and myself have a varied model of the above (with the help of an old school mate who says accounting is like fishing to him? What a freaking weirdo). Anyway, understanding that buying a house outright is always the best solution financially; we just couldn’t see sense in buying a house in Sydney that we’d find comfortable in under our present income, (about AUD$800,000.00 for a decent house that is still about 1-hour out of Sydney, what a joke).

However, at present we have no children and we don’t need anywhere too flash to live. So we compromised and purchase a 4-bedroom, 2-bath house over on the North Coast of Perth (huge growth area) with ocean views and in an excellent neighbourhood for about 300k. We could get around the Australian first home owners grant of 7k by saying we were going to live in it, we redirected our mail to the house, changed our electoral roll information (my wife is not allowed to vote anyway) and let my little bro house-sit for 3 months to ensure the property used electricity and looked to be lived in, (thanks for the 7 grand Mr Howard).

Anyway, after 3 months (which is not yet over), we’ll contact an agent and rent the property out, the rent from the property should easily pay for the rent of our meagre unit in Sydney and we should still have money left over to aggressively pay off the home loan. (Which is a shit load easier than paying off a $700,000 loan for a house in Sydney)

Once we own at least 75% of the house we are looking already at doing it again and having two property’s in which we can use as collateral for something larger.

But hey, every persons needs are different. We love to travel and we are still destined to move over to Hamburg around February next year so a financial model that does not rely on us living anywhere we own is ideal…

Example C: (leasing)

I’ll take a leased vehicle if someone else is paying the lease…

Tschüs

[hearing_aide]

Like fishing?

Deadcat you need to re-evaluate your friends! What is this guy like at parties.....sorry but my mind keeps going to Rick Moranis in "GhostBusters"....LOL

Thanks for the Help!

H8

[DeadCat]

aide,

I was lucky enough to go through high school with an excellent group of kids, no real segregation into groups, out of the couple of kids that were dickheads in high school; they have actually turned into full-grown dickheads. Anyway, on the fishing accountant, he’s just someone I know from high school and someone that I know I can trust. He also does a few the other old school blokes tax returns for them too. (at 28 he's over the million mark in assets, not withstanding debts of course)

The last time a met him was about 3 months ago after a short trip to Perth (of which the cost is also a full deduction as it is a cost component of managing my tax account), his house was empty with only a study with heaps of crap in it. He explained that the house was on the market and needed to keep it clean, he also rambled on about all sorts of tax and financial shit. Anyway, one thing I picked up on is that he has his houses revaluated every 3 months and re-borrows on any increase in value.

I’m telling you now; the guy is an accounting freak! But is really, really handy with those boring annoyances they call tax returns….

[King_Aj05]

ha ha ha,   My fishing trips involve dressing in my oldest clothes, going to some remote part of the country and drinking copious amounts of alchol and reliving my imature past!  I hope your mates is accounting is quite different to that for your sake DeadCat! LOL

Now firstly to cars where I have err some knowledge...

Leasing
If the car is for business you can claim the whole payment as a tax deduction.  The only problem is that you have to pay GST on each payment.  Not that much of a problem because you can claim that at the end of the period, but it means a higher cash out flow and off memory, you can't claim the GST up front on the car purchase(not 100% on that).  

Leasing- your paymenmts are fixed and interest is calculated on the whole term...hence if you payout your 4 year lease in 2 years, you still pay 4 years worth of interest...and this is where alot of people get into trouble as the payout is too high and they carry the minus equity into the next car.  The other benefit to the lease is that you can have a residual/balloon at the end of the term, meaning that you can pay less per month over the term of the loan...better cash flow.

Loan
...well now days you can put a residual on your car loan in most cases.  If its for business you can still claim the interest on the loan and you can depreciate the car and claim 100% of the GST in the first year...hence not much different to a lease in terms of tax benefit.  You can get loans with interest on daily balance meaning that if you payout your 4 year loan in 2 years, then you only pay two years of interest...many businesses, especially small business's are now going this way.

Residuals
...the main benefit is that you can get much more car for the same payment.  For example lets say you can afford $100 per week to buy a car.  This will get you say $20,000 and you can buy a new shopping trolly or a 3-4 year car.  But if you use the residual and set it say at 10,000, your $100 suddenly gets you a much better car...say a nice Peugeot 206 GTI!  You have the benefit of a new car...warranty, safety, enjoyment, economy, reliability, better resale (depending on what you buy) and of course zero kms on the clock!  At the end of your 4 years, the car should still be worth at least $10,000, (lets say $12,000) so you trade it in for another new one...$10,000 goes to the Finance Company, $2,000 to you.

The other point is why have your own money tied up in such a depreciating asset!  Lets say you did buy your $30,000 Peugeot with cash...this means you have an extra $100 per week in your hand.  BUT when you consider that interest rates are about 8% and are fixed, couldn't you go and use the $30,000 in an investment that returns better than 8%?  Of course you can and this is was the smart ones do...they drive a new car and have their money working better on something else!

Now the above paragraph is excactly what DeadCat's accountant is doing with his property.  He borrows the maximun on the value of the property and uses it to go and earn more money, or a higher percentage than the home loan...quite simple really, but it can be a bit risky.  the problem comes when the interest rates go up, or one of his properties are without a tennant so he has to cover the payment...he can claim it back in his tax...but it's the cash outflow that can be the danger...also if he's investing the extra on the stock market, we all know the risks there...however he is definately on the right track and I intend to do a bit more of that stuff later this year as the Queen has gone back to work part time now and our cash flow is improving.

Another way to look at it with an investment property is to think interest only.  So you buy say a unit/flat for say $150,000 (in Adelaide of course lol) and borrow say $120,000.  but instead of paying it back, you just pay the interest and allow for capital growth.  So lets say you sell it in 5 years for $200,000, $120,000 goes to the bank and $80,000 to you...so the effect is that you've used the banks money to make you money and the tennant has paid the interest on the loan for you...you just had to have the capacity to borrow the money and service the loan!

That's enough, you can all wake up now and read something else now! LOL

Aj
King of finance...

[RacerX]

I once had a very wealthy doctor tell me:

"If it floats, flies, f*cks or drives...you LEASE it!  It's cheaper in the long run"....LOL, of course he was telling me this while he was taking delivery of his new Landcruiser...LOL!



ROFLMAO,
RacerX