CFP

Financing Strategies - Buy Vs. Lease/Rent

Housing - Rent or buy?
Compare the cost of renting to the cost of buying over multiple time frames, for example 1 and 5 years. Buying becomes more advantageous over time.
  1. Cost of renting - Use multiple time frames, for example 1 and 5 years.
    Monthly rent
    + Renter's insurance
    + After-tax opportunity cost of interest lost on security deposit
    Total cost of renting

  2. Cost of buying - Again, use multiple time frames to make comparisons.

    Monthly mortgage payment
    + Property taxes
    +Homeowners insurance
    + Maintenance, utilities, heating, etc.
    + After-tax opportunity cost of interest lost on down payment
    + Closing costs
    - Mortgage payments going toward loan principal
    - Tax savings from deductions on mortgage interest and property taxes
    - Estimated house appreciation
    + Real estate sales commission to sell
    Total cost of buying

Automobile leasing
  1. Closed-end lease - Vehicle is returned at the end of lease and the consumer walks away with no further responsibilities, assuming the vehicle is in good condition with normal wear and tear. Also known as walk-away lease.
  2. Open-end lease - If, at the end of the lease, vehicle is worth less than had been estimated originally (residual value), the consumer pays the difference between the market value and the residual value.
  3. Buying vs. leasing
  • Cost of purchasing
    Down payment
    + Total loan payments
    + Opportunity cost on down payment
    - Expected value of car at end of loan term
    Total cost of purchasing

  • Cost of leasing
    Down payment
    + Total lease payments
    +Opportunity cost of down payment
    + Any end of lease charges
    - Refund of any security deposit
    Total cost of leasing



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