How to Think Three-Dimensionally About the Rent or Lease or Buy Question

wealth management, lease versus buy, [PARTNER FIRM]

Rent or lease versus buy is one of those financial questions you have to approach three-dimensionally. A lot of it depends on you: Does having to shovel two feet of snow from a driveway offset the satisfaction of ownership? Does having a monthly bill (with no equity to show for it) offset the maintenance and frustration of an older car? 

There’s more to this central question – rent/lease versus buy – than simply the numbers in your bank account. What you don’t spend in cash, you may spend in time and energy; what you save in this market you may pay for a year from now when the market is depressed. Where you are on the wealth/life journey, how often you move for work, if your kids are home or grown and gone and other life circumstances complicate the question by degrees. 

Let’s look at some common places this question comes up – home-ownership, second home-ownership, cars and large-scale equipment – and see how three-dimensional thinking can help you answer it.  

Real Estate 

Real estate is big business and always has been. More than 5 million existing homes and 650,000 new homes were sold in 2018. There are 86,000 real estate brokerage firms in the country and about 1.3 million members in the National Association of Realtors. A lot of money changes hands very quickly, so clarity on your life/family/career situation is essential when approaching the buy versus rent/lease question. 

The knee-jerk reaction on this – especially if you ask the Baby Boomer generation or above – is that to rent is human and to buy is divine. If you can buy a home, especially if you can pay it off and resell it, you generally make your money back and then some. Renting or leasing is often seen as tossing money out the nearest window.

But think about it three-dimensionally. The real estate market is usually somewhat stable, but no guarantee (2008 anyone?). You could end up simply breaking even or maybe underwater when you sell the house. You also have to factor in closing costs, maintenance, property taxes and the other not-so-hidden fees of homeownership that bring up that monthly mortgage bill. 

What if you took the money you’re saving by renting (i.e., NOT spending on complex fees and taxes) and invested it? You might clear money reselling a house after five years (if you’re lucky!), but what if you were able to make that much by investing the money you had leftover after renting? You could clear the same profit and do so without the worry, maintenance and hassle of owning a home. 

Other factors come to mind, too. Many jobs require you to move regularly, and buying and selling a home in the space of five years puts you at risk for loss, especially if you do it more than once. Ask yourself why you want to buy a house. Are you hoping the kids will come home to visit when the reality is they’re all over the country? Are you newly married and want to create a home with your spouse? Are you settling down or nearing retirement and over-55 housing?

Second Home 

Three-dimensional thinking will also help you in considering a second home. You’ve put enough money away and chosen that favorite vacation spot where you always find yourselves, so you decide to purchase property. 

It can be helpful to clarify for yourself why you want that cabin in the woods or the cottage on the lake. Are you looking for a place for the grandkids to make memories or somewhere to retire? A second home is an even more complex financial question, and often has more to do with your relationships and memories than concerns about price tags. 

Renting out your second home is complicated, even with the current revolution in AirBnB and other groups. Having maintenance and cleaning done for you by proxy, especially from far away, can become expensive and eat into whatever profits you’re hoping for. If you have debt on the house, then making money on it is near impossible. 

Keep the 14-day rule in mind here. If you rent the house out for 14 days a year or less, you can pocket what you make without taxes. Also, if you live there for less than 14 days a year and rent the place otherwise, you could write off $25,000 in rental losses because it is considered a “rental property.” 

But think through this one. How much could you really make renting the place out two weeks a year? Is it worth the effort (cleaning, potential damages, complaints)? And, are you only going to stay there for less than two weeks annually? 

Again, questions about a second home involves a lot more than simply dollar amounts. Layout what you value, your goals and what’s in your comfort level and go from there.

The Car Question 

When you think about buy versus lease, the automotive question comes up quickly. Is leasing a car really just throwing money away so you can look good in the latest model of X? 

Buying a car gives you the independence of ownership, without anyone looking over your shoulder. There are no mileage limits, and the wear and tear on the vehicle doesn’t concern anyone but you. When you go to resell the car, anything you make back goes straight into your pocket, and you can get back a lot of what you’ve put into the car over the years.

Leasing a car gives you some measure of freedom from the headache and worry of ownership. When you lease, you always get a late model and have fewer repairs (hopefully). Your taxes are included in your payments, so rates are simple and upfront. You don’t have to deal with an unpredictable resale value and you don’t have to worry about the technology becoming dated in a few years on the car.

There are pros and cons to both sides of this question. If you’re a young couple with wonderfully rambunctious kids, a used minivan you can drive until the wheels fall off might fit the bill. If you’re a retired couple in a snow climate who needs a four-wheel-drive that always starts, maybe lease that small SUV. 

Big-Ticket Items 

The category “big-ticket items” goes further than homes and cars.

Small businesses often rent equipment, whether for food preparation, medical practice, farming or other trades. Your time is your most precious commodity as a small business owner – stopping production for repairs or maintenance can mean big money. Unfortunately, with constant technological innovation, equipment dates itself quicker than ever. 

If you’re working on a home project, it may not make sense to purchase a $400 tool or piece of equipment if you plan on only using it once or twice. Rather, you can rent tools from your local hardware store or hire someone to do that aspect of the project for you.  

Then there are the big-ticket entertainment purchases – campers, boats, ATVs, etc. Location can be a big influence on these types of purchases, along with usage. In Nebraska, it may not make sense to own a boat for your one or two summer excursions. In Michigan, you may be on the water every few days and it makes more sense to own.

Every factor plays a part in answering this question – rent/lease versus buy – and it’s up to you to make that decision. There are pros and cons, either way, just make sure you’re thinking beyond simply dollars and cents.

To help aid your decision process, we put together a free guide to the fundamentals: “Back 2 Basics: 12 Tips for Improving Financial Well-being, Reducing Debt and Increasing Net Worth.” 

Download your free guide!

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