Sharing Daily Discoveries About Personal Finance And Business Topics

Buying VS Renting and Leasing

For a lot of things that cost a lot of money, there is usually an option to lease the item in question which essentially gives you what you want temporarily at a fraction of the cost of buying it. In most cases I would say it is better to simply buy the item if it is something that you will use a lot as you will basically be investing in something which will still have value as oppose to simply giving away your money.

Buying a home or some kind of place to live in is a great example of this I’d say. For a lot of people they look at it how there is no way they could afford that place which costs $200,000 compared to say paying less than a $900 a month to rent/lease something. Even when I look at that at first it seems like a logical choice to go for the $900 route if you are in a lower income bracket. When you really sit down and think about it though, it can really open up your mind in terms of thinking things in a bigger picture when deciding to buy or lease something.

These numbers are completely made up, but let’s say for that $200,000 home you were able to arrange a plan that allowed you to payoff that home in fifteen years which is about $13,333 a year or roughly $1111.08 a month. At minimum, let’s say we are living at this place for maybe 3 years. So if you were to just lease a place for $900 then your total would be about $32,400 and your current total in paying off that home within the third year would be $39998.88. Now the negative thing that comes to mind is now that you are moving, you still owe about $160,001.12 as a result of that fifteen year agreement. Is it really that bad though?

While I have to still have to payoff that amount, what if I decide to sell the home? Hypothetically, let’s say I decide to sell it to someone else for exactly the same amount that I was going to pay for it which is $200,000. The person gives me that amount, I payoff the remaining balance that I owe and leftover is $39998.88. If you think about it, that means I just broke even where for the three years I was living at that house I was basically getting free rent. In the other scenario I lost $32,400 for the three years that I lived in a leased place. That sure puts things in a different perspective huh?

Now obviously it doesn’t work exactly like that as you have to factor in things such as how selling the place would count as income and so you will have to pay taxes on top of that and at the same time there could be other factors that benefit you even more such as the value of your property going up. But hopefully that helps to open up your mind if you are normally one of those people who simply base your decision on whether to buy or lease something solely on your current income in a short-sighted way.

4 Comments to Buying VS Renting and Leasing

  • It’s an interesting debate, but finding a home for $200K is not realistic where I want to live. The problem comes with the fact that whether it’s rent/mortgage you still have to be able to service the payments. If the $900 is actually two or three times that then it becomes a problem. Quickly you can exceed the 30% threshhold which means getting a mortgage in the first place becomes more difficult.

    I read somewhere that the average is currently $700K in the lower mainland. Using your numbers that would be not $900 but $3150 (I think!) per month. Let’s say your take home pay is 75% (happy to throw in a better percentage here) of your gross, that means simply to pay the mortgage you are looking at a $50K salary a year. If you keep to the 1/3rd idea of your mortgage to total earnings you are looking at needing a $150K salary to buy the $700K house.

    The problem of course being that average salaries in the city are no where near this level. Half this?

    It’s a big discussion area but one of things I like about Vancouver is there isn’t the snobbish behaivour I saw in the UK – where if you rented you were a third class citizen!

    In fact to me leveraging yourself up to buy a somewhere can lead to poor financial decisions elsewhere – like subsidising your cashflow through increasing numbers of credit cards! The other problem I find in Canada is that the quality of house building is simply shocking – $700K for a poorly built and maintained property is a curious decision.

    Of course the house build also applies to your numbers. Say the heating needs replacing or you need a new roof. YOU will be responsible for that, it’s your problem . these things can easily wipe out your rent-free idea (nice as it is!).

    Add to this that there are a huge number of immigrants coming into the city who can not bring their credit histories with them. They are faced with the prospect of only getting poor deals on mortgages if they can get them at all.

    I’m not saying you are wrong, or it can’t be done. I just wanted to share a few thoughts and continue the discussion!

    Stewart Marshall 4/7/2007 8:03 pm
  • I definitely agree with your points. I was using this home example in a more general sense. You can replace it with a condo, townhouse, deciding whether it is better to buy or lease a car and so fourth. As mentioned, completely made up numbers just to get the point across. Those are great and legitimate points you bring up though.

    For housing quality and prices, I’ve never lived in other countries before and so it all seems normal to me. I guess it must be like visiting other countries and thinking their prices for certain things are so expensive compared to here when it is perfectly normal to them.

    Alan Yu 4/7/2007 8:23 pm
  • Well of course cars are different to houses, imho. houses do tend to appreciate whereas cars depreciate the moment you drive them off the forecourt!

    Renting can be a lifestyle decision wrapped up in personal circumstances.

    One idea that came to me the other day was that if I rent instead of buying I do not contribute to what I call the real-estate spiral. I wonder what the housing stock levels are – this is new to me, but are there enough houses for the population (which I know has falling birth rates) ? Or do we need to keep building more?

    How do you avoid having to build MORE cheaper houses, because the rest are too expensive for everyone. It’s not very sustainable behavior …

    Another thought, people I chat to tell me that finding contractors to do anything to a house is more and more difficult. Sure there maybe a shortage, but the bigger problem is greed on the part of contractors themselves. Finding GOOD contractors is even harder.

    I don’t know about you but I don’t know how to put in a heating system or a new roof. Strikes me as having to deal with the contractors would just add more stress to my life than I want!

    Stewart Marshall 4/7/2007 8:53 pm
  • I’m not sure of the exact statistics here when it comes to things like the ratio of available housing to the population. Maybe there is something in the Statistics Canada site that would reveal this.

    As to how to avoid building more cheaper houses because the ones we currently have are too expensive, I’ve seen many cases where people don’t want to buy a house simply because they don’t need all that space but they still want to own one. I have seen some people actually gather up a group of people who have similar thoughts and they purchase and live in the same house together. I guess that kind of defeats the purpose on why many buy a house and maybe you are better off with say a small condo, but it’s an option I suppose.

    On a semi related note to that point, what others do is that they buy the house entirely by themselves and then say rent out portions of it like the basement. In turn, it’s almost like they are paying for your mortgage and it’s not like they needed all that space anyways. Can be a good way to do it too and I guess that would be a possible sample on how buying something can make more sense as oppose to just renting it.

    I’ve actually seen people do this for office spaces too as an example. Basically, they first try to get someone to agree to a five year lease term for an office space that they don’t yet own but know it is for sale. Once they are confident that the person will agree with the five year term, they then buy the space from the actual owner which in turn gives them a new property that the person leasing is essentially paying for. Some tricky stuff there.

    I’m not much of a tradesman myself, but I guess it’s fortunate that I know people who are into contractor type of work. Like anything, I guessing having a good network of contacts in a wide variety of industries is beneficial. I always try to go through personal referrals in these types of cases whenever possible.

    Alan Yu 4/7/2007 10:14 pm

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