Surface Ripples

Rent vs Buy

 I’m always interested when I look at the costs of renting versus buying something. Sometimes one makes more sense than the other.

Let’s take a simple example. We can buy a house with a mortgage and pay, say, $1,000 per month mortgage instalments.  Alternatively, we might rent a house for $1,000 a month. In each case, depending on the terms of our contracts, both mortgage and rental costs may increase periodically. The difference is that buying a house on mortgage allows you to own a property which, if it appreciates in value, can be sold for a profit. Renting, on the other hand is a “sunk cost“: money paid out in rent cannot be recovered.

The advantage of renting, however, is that we may not be liable for maintaining the building as we would be if we owned the property. Just as rental costs can go up when demand for rentals is high, they can go down when the market is low.

The above is a problem for many (or at least those who can afford to buy a house). A more recent example of where ownership might deliver more value than renting lies in the price I recently saw for renting the latest “Jurassic World" film on iTunes. For a one-time cost of £15.99, I can watch the film once (with as many people as I like) in the comfort of my own home. Compare this with the price of cinema tickets and drinks/snacks in the UK for a family of four or even for a couple, and this is worth it.

Alternatively, I could wait a few months and the film would be available to purchase on iTunes (for £13.99 if past behaviour is anything to go by).  I could then buy for a reduced price and watch it as many times as I wanted.  Wait a year or so, and I could probably buy it at a much-reduced price as the iTunes Store tends to drop prices after a year or so.

In this case the cost of ownership reduces every time I watch the film. In the case of buying a property on mortgage, one might say that the incremental cost decreases the longer one lives in the property. Hopefully, one happy day, the mortgage will be paid off and the property will be mine to keep. Any capital appreciation on sale is mine to do with as I please. If I wish, I could also remortgage it and use the finance raised for other purposes.

Another example might be deciding to lease a piece of equipment for my business, rather than buying it outright. Leasing means ownership of that equipment remains with somebody else, as do the costs of maintaining and replacing it if it proves defective. There might also be tax benefits to me to lease the equipment, rather than own it.

Renting/leasing versus buying offers advantages and disadvantages. For equipment, it may be better to rent or lease it, as ownership remains with the person renting it to you, and therefore so do the costs of maintaining it. The rental agreement may also allow for you to replace the equipment after a certain period of use or if it breaks down. All this at no extra charge. The risk remains with the party renting it to you.

In some cases, outright ownership, and therefore control, of the item or property in question may make more sense.

As business owners, we are often faced with whether we should buy or rent/lease A property or equipment. Sometimes there are even tax advantages to doing one over the other.

What is best depends on the circumstances: how much can you afford is it better to own or lease the item or property concerned, is there a tax advantage in either owning or leasing? If you own, at one point, if any, do maintenance costs start to outweigh the benefits of owning that item?

I’ve spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With a wealth of international experience in international financial services around the world running different operations and lending businesses, I started my own Consultancy to provide solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. My website provides a full picture of my portfolio of services.  For strategic questions that you should be asking yourself, follow me at @wkm610.

Labels: Financial, Productivity

posted by William Martin @ 08:42