Should lease or buy a car or home be a hard financial decision? Yes. Because there are more variables than the financial ones.
If you are looking at a business space or a manufacturing machine it is not difficult. In those cases, it is just another way to finance an asset that you intend to use for a long time. Quite clinical.
What about a home or a car?
Cars are easy financially. Leasing is not cheap but it is very convenient and presents you with peace of mind issues, like repair costs and a monthly allocation of your budget. Or maybe a lower cash cost initially to acquire prestige value. As with everything else in life, convenience costs. The highest rate of depreciation of a car is in the first three years. When you lease, you always pay for that. Cheaper would be to buy a 3-year-old vehicle and keep it for a long time. The clinical rule is, “Never buy a new car and never sell a used one.”
Housing is harder because homes are emotionally important. Owning is a priority for many. Financially though, homes are cheaper to lease. The variable costs of ownership are very similar. Heat and hydro are the tenants cost. Some repairs are too. The same either way. Municipal taxes and some of the insurance accrue to the landlord. If you buy, the taxes, major repairs and some of the insurance becomes your cost. In addition you pay interest on the mortgage and lose the use of the capital that you invest. But, you pay rent. Should be about equal or the landlord loses.
I hear that rent is always wasted while ownership builds equity. In my view, mortgage interest paid, municipal taxes, insurance and major repairs are wasted too.
But, the house appreciates so it is partly an investment. Maybe and maybe not. If you look at the Case-Shiller Index, you will find that the purchasing power value of a house does not change much except in bubbles. If you want to believe in your ability to buy low and sell high, then you should own as an investment. Good Luck.
Again for extra cost, you get some feel good benefits and maybe a profit
Globe & Mail financial writer and author Preet Banerjee has prepared a calculator to address the issue. Here.
Being rational and objective about emotional and subjective issues is a loser’s game. There is no right answer that applies to everyone. Many people will happily pay extra to own and others will not. You will be required to determine who you are before the numbers will be valuable.
Think of the house a package of values. Some financial like a potential gain or forced saving. Other emotional like predictability and the homestead idea. You must address how much you would pay for the emotional parts before you decide on the financial side.
Again, details can get in the way. Try to run your life to suit the strategic view of what you value.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.