Car Lease vs Buying: Hypothetical

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teke1600's picture
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Joined: 2008-04-29

I've read up a little bit on this topic and would like to share some of what
I've learned from my financial background, and how it applies to the "lease or buy" a car
scenario.  I’ll try to make this clear
and if I am incorrect about any of this, please let me know because I am always
learning!

In this example well assume you have good credit, which will make each
scenario more clear.

**Remember this is hypothetical and does not claim to be exact #’s!

1.     
 Lease: 
You get a brand new 2008 Honda for $300/month, no down payment, 15k
miles per year.  In 2011 you will get a
brand new Honda for $325/month (inflation). You will always have the warranty
for both cars. 

 

2.     
 Buy: 
You get a brand new $25k Honda for $450/month (with a low rate) for 5
years. You get a 5 year warranty and will eventually own equity in the car.

 

In a perfect world, well assume that you choose to put the extra $150 a
month you “saved” by leasing instead of buying into an investment where you
could potentially gain high interest. 
Here is how the two scenarios could play out.

It is now 2013:

 

1.     
 Buy: 
You now completely own your 2008 Honda. 
You own all the equity in the car, which is now worth between
$10k-$12k.  You would have to sell the car
to get that money, and the longer you hold it, the more it depreciates.  You have spent $27k already into the car and
now that the 5 year warranty is up, you will be responsible for any
repairs/damages from now on.  You could
potentially save a lot by keeping your car for 5-10 more years but would then
sacrifice a lot more equity and take on more repair risk (and even the risk of
having to buy a whole new car soon). 

 

2.     
Lease:   You
now have a 2011 Honda and will have a 2014 in one more year (after 6 years
total).  You drove a 2008 for 3 years and
the 2011 the last 2.  You have spent a
total of $18,600 the past 5 years + plus the risk of going over the miles or
repair fee’s if you mess up the car. But you have also now have $8400 in cash +
interest ($150 month first 3 years and $125 thereafter) which could be
significantly more if you invested correctly over the past 5 years.  You still have a complete warranty on your
car and will have the new options of a 2011 Honda and soon a 2014 Honda.  While you have spent a lot to “rent” your car,
your cash equity could be significantly high if you invested on schedule and
correctly.

 

So, In conclusion the best option in my opinion is IT DEPENDS.  But it really depends on if you want your
equity to be in your car (to save by keeping longer) or in potentially cash
after 5 years (but the cost of paying always thereafter).  The equity gained by buying might not be as
important to you as the power of always having a new car.  You will have to continue to pay close to $5k
per year or more by continuing to lease after 2013, which will change this
scenario a lot over the next 5 years (if say you kept your bought 2008 honda until 2018).  Plus, if you choose to spend the extra $150
per month instead of save it, well then you have zero equity but had more to
spend over the years. 

Again, I will not claim to be a car expert and this hypothetical situation on
the financial aspect of buying or leasing a car.

troll's picture
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Joined: 2004-11-29

Oh god.  What kind of clients do you work with (if any) to make you go through such an exercise?What you DIDN'T factor in was if it was a BUSINESS LEASE and those payments can be an "above the line" tax deduction for the business owner.  Why not let the government pay for your car?You didn't factor in the fact that MOST people drive more than 15k miles per year.  What happens when you go over 15k miles?  You drive your very own expensive taxi.I think you would be happier working for a CCC-type of company than being a financial advisor to people who have money and have made smart decisions with their money so far.  (CCC = Consumer Credit Counselor)

doberman's picture
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Here's a much simpler way to determine whether to lease or buy:
 
If it's a Honda, Toyota, or Nissanbuy it. The car will last 10+ years. You'll only have to make car payments for less than half that time. Well-built, great gas mileage, plus it will hold its value as the dollar continues its descent. Win, win, win.
 
American car, lease it. You're not going to want hold an American car for more than 2-3 years. It's not well-built and the paint job will soon fade. Car lease payments every month for the rest of your life.
 
This is based on my experience:
 
1976 Toyota Corolla: Parked it for 2.5 years while I was overseas. Came back and it took 10 minutes to start it. Filled it with gas and drove it 200 miles. Ugly as sin, but rugged as heck.
 
1984 Olds Cutlass Supreme: Beautiful car, lousy transmission.
 
1989 Mercury Grand Marqis: Lousy transmission. Steering wheel oozed a black goo when parked in the sun. Numerous problems.
 
1994 Nissan Sentra: 295,000 miles. Transmission finally gave out. Paint job faded after a few years.
 
1997 Honda Accord: 515,000 miles. Yes, 515,000 miles. I bought it with 30,000 miles on it, same engine, same transmission. Interior held-up great. Paint job beaded water all but the last couple of years. (Damn, I miss that car. I sold it for $350.)
 
2008 Honda Civic: Proud owner.... 
 
So, as you can see, my experience speaks for itself.
 
Now, I'm sure someone has experiences just opposite from me, but I will never, ever own an American-built car. Detroit has cost me a lot of money, but my boycott of any American cars will cost them even more. 

Anonymous's picture
Anonymous

Dobe,
 
Any German/Italian cars in that mix that you may have left out? 

troll's picture
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teke, maybe it's stupid crap like this that is behind why you have not closed a sale yet.  I could have made 5 calls in the time it took me to READ it, God only knows how many calls you could have made in the time it took to write it.

teke1600's picture
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Well Primo I can already tell that you don't like me thats why you have been bashing me and my VA recommendation.  Please don't post in anything I ask if it is just going to be negative and pretty much useless. I did research on leasing for my own car and just thought I'd share in the lounge area.  I'm sorry that the lounge area is part of your personal space and I invaded it.

Anonymous's picture
Anonymous

Teke - He didn't "bash" your VA recommendation.  You asked, he (and others, including myself) responded.  If you don't want a real response, don't ask us for our opinion, ask your mother, I'm sure she'll positively reinforce your investment recommendations.
 
I realize this is the "Lounge" section, but did you really expect zero ball busting when you post an 18 page novel about a decision to buy or lease a freakin' Honda?  I'm not trying to "bash" you, but you need much thicker skin. 

charlie_broker's picture
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I know Ferris has missed me so I'll give my 2 cents here ...w/inflation... nickel's worth.
Where's that cool CFP jodabrkr these days?
My FA, Suzie Orman, says never never lease.  You'll never come out ahead this way.
Always plan to drive the car at least 10 years, if possible--the millionare next door, does, anyway.
 
Re: Warranty:  Don't know:  Normally, your vehicle will hold up till the warranty expires anyway and doesn't cover your usual wear items. I'd say it's safer to just go with the factory warranty since more than likely anything else is a rip off.
 
Maintenance?  Indy or Dealer?  To get the warranty coverage, you have to use a dealer for repairs and they know the make better so it's probably ok to use the dealer for repairs and servicing unless you feel they are really overcharging and ripping you off.  

troll's picture
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teke1600 wrote:Well Primo I can already tell that you don't like me thats why you have been bashing me and my VA recommendation.  Please don't post in anything I ask if it is just going to be negative and pretty much useless. I did research on leasing for my own car and just thought I'd share in the lounge area.  I'm sorry that the lounge area is part of your personal space and I invaded it.
 
Useless?  I gave you a very plausible alternative to your VA question and I believe I answered each of your questions.  If that is not what you were  looking for I must have misread.  My mistake.  As for this thread, let me rephrase.  You have been in the business about a month or two and I want to commend you on being licensed.  Good job.  Try and spend as much time prospecting as you can.  My mentor told me when I started "For the next six months you should be prospecting or sleeping, period.  After that take Sunday afternoons off, but still prospect at church in the morning."  I found this advice to be invaluable and wish to pass it along to you.  Kumbaya, happy happy joy joy.

OldLady's picture
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teke - a couple of other things you overlooked in making this decision (business benefit of leasing vs. buying and the cost of additional miles driven over 15,000 have been pointed out already). 
 
Insurance - if you lease, your auto insurance costs will always be high, because you will be required by the lease company to insure it at a certain high level and you will always be driving a relatively new car.  You need to compare insurance rates in years 4 and 5 and subtract the higher insurance costs of leasing from your "savings."
 
Annual Licensing/Registration Costs - in many states, these costs are linked to the current value of the vehicle.  The leased vehicle costs will increase as you are driving a now more expensive car than the previous 3 years.
 
Cash Option - Let's say I had $27k sitting in my account.  You say I should take $300 monthly for my lease.  In 3 years, I take $325 monthly.  At the end of 5 years, I have $18,600 left in savings.  I still have to make a lease payment, so I pay $325 monthly for year 6, then get a new car, my lease payment increases to $352 (same % increase as the previous lease).  When that lease is up at the end of year 9, I have $2,028 left in savings and the new lease is $381.  Before I'm into this lease 6 months, I'm out of my savings (10 and a half years).
 
If I pay cash, I have a vehicle (providing 15,000 miles annually) I could drive 11-12 years  (175k miles) without major problems.    I found this website pretty interesting on high mileage Hondas http://www.hondabeat.com/highmiles.php
 
Inflation Projections - you estimate lease payments increase 8.33% every 3 years (2.78% annually).  I am guessing this may be a tad low.  When leasing, you are entirely at risk for inflation - when you buy at today's prices you lock in that price for as long as you are able to keep that vehicle running.
 

Dark Knight's picture
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teke if you are new in the business consider saving even more by either buying a vehicle a couple years old or buying out an existing lease. 

henryhill's picture
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I have owned American cars and they have held up very well ( I traded in my cherokee with almost 200k in miles.)   According to the book, "The Millionaire Next Door"  most millionaire's buy, not lease.

doberman's picture
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iceco1d wrote:Dobe,
 
Any German/Italian cars in that mix that you may have left out? 
 
No, but I have always admired Beemers & Jags (earlier models). I know Jags have had a bad reputation, while I've never heard any good or bad about Beemers. But they're easy on the eyes. I have a couple of other cars (standard fare), but they are still in the road test phase.
 
If I could close a couple of white elephants I'm working on, maybe I could afford to "rent" this for a few weeks:
 
http://www.liveleak.com/view?i=1e0_1182966268
 
 

Anonymous's picture
Anonymous

Haha.  I'm very familiar with that car (not personally of course, strictly through envy!).

Spaceman Spiff's picture
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Dave Ramsey says never (f)lease a car.  The only person who wins on that bet is the dealer.  He also says cars take the biggest deprecation hit in the first 4 years, so look for one that is just a bit older.  Perhaps one of those cars that someone leased for 3 years.  They've taken the brunt of their depreciation and they've been taken care of pretty well because the guy leasing the car knows he can't screw it up or he'll pay through the nose for it.  Finally, he also says that rich people don't make payments.   They pay cash for their cars.  They've realized it's stupid to pay interest on an investment that constantly depreciates. 
 
So, in short, pay cash for a gently used car.   

Broker24's picture
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This is a fun conversation, but Teke, Man, this should not be something you should need to consult a chat room about in our line of work.
 
I like what Doberman and Spiff both said.  Buy a Honda or Toyota (or Acura/Lexus if you need to for your reputation ) that's a few years old.  Find a good indy mechanic (stress GOOD), not the dealership.  And then drive the thing until your grandkids can inherit it.
 
I am sure we've all seen it, but there are people out there that have $800-1,000/mo. in car payments, on top of the high insurance for the newer cars.  And they say they just "budget it like a mortgage payment, since everyone has car payments forever."  Uhhhh, no.  I must say, this is one of the few places where Suzey Orman earns her money.  That and credit cards.  Talk about wealth drains.....
 
I drove a crappy old Volkswagon for 12 years.  I could have afforded anything I wanted, but lived in NYC, so your cars get trashed.  My staff (that made 1/4 of what I made) would laugh at me.  But you know what, that's why I have never financed a car - ever.  And those guys are still paying $600/mo. for their newest whatevers, and can't buy you a beer without putting it on their credit card. 

 
I now own a used Honda Accord.  Love it (boring!).
 
 

Morphius's picture
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Spaceman Spiff wrote:Dave Ramsey says never (f)lease a car.  The only person who wins on that bet is the dealer.  He also says cars take the biggest deprecation hit in the first 4 years, so look for one that is just a bit older.  Perhaps one of those cars that someone leased for 3 years.  They've taken the brunt of their depreciation and they've been taken care of pretty well because the guy leasing the car knows he can't screw it up or he'll pay through the nose for it.  Finally, he also says that rich people don't make payments.   They pay cash for their cars.  They've realized it's stupid to pay interest on an investment that constantly depreciates. 
 
So, in short, pay cash for a gently used car.    Dave Ramsey?!  Dave Ramsey?!!!!Next thing you'll start quoting Suzie Orman!You feeling OK today, Spiff?

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What, you don't like Dave Ramsey?  His message is pretty simple, mostly biblically based, and doable for the average person.  I don't always agree with what he says, but in this case I do. 
So, yes, I'm feeling alright.  I can't actually say that I've ever listened to Ms. Orman, so you'll not be getting any of her quotes from me.   

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Gently used is the way to go (other guy took the biggest hit from depreciation, yearly excise tax, insurance etc...) Cars, even domestics, are built so much better than even 10 years ago that 150K miles s/b no problem w/o major repairs.
 
I have a philosophy of doing the opposite of one of my neighbors. He just bought a brand new Toyota Sequioa, We bought a 4 yr. old Town and Country. We paid cash. He says his rate is "prime minus a half." Uh oh.
 
He scolded me back in 2003 when he bought his house when I mentioned that there's no guarantee the real estate market continues to move due north. In fact, he scolds himself for not having the foresight to take out an interest only loan like some of his "smart" friends. We refinanced the house we bought in 1998 into a 15 yr. fixed.
 
We talk about investing for retirement and college. On top of his 401-k I mention that he might want to set-up an automatic savings program w/ a 529 or some good funds such as Fairholme, Janus Orion and Oakmark Global might not be a bad idea. He tells me that mutual funds aren't "sexy" enough for him. He takes another advance against his home and invests with a local guy who runs what he calls a hedge fund. Returns 20% per year, every year. I ask what he invests in. My friend does not know. Uh oh.
 
It really is true. 

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When Ramsey and Orman spout off a quick answer to every question, there is a potential to oversimplify.  None of us meet with our client for 20 seconds and then give the recommendation on what is right for them, but that is what happens on radio all the time. 
 
On top of that, another problem with Ramsey is that people believe everything he says comes straight out of the bible, so it must be true in every circumstance.  I had a client argue with me that he didn't need life insurance, because Ramsey said it is a waste of money (haven't heard this myself, but I don't listen to Ramsey much either).  My side of the argument was that he had 3 kids, uneducated stay at home wife, very nice salary, and no savings.  His argument was "Dave says."  I am assuming he it taking this out of context, and hope for his kids sake that (1) he doesn't get himself killed, and (2) that they grow up to be smarter than he is.

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Dave Ramsey is big on Life insurance.  He shills for zanderdirect.  His thing is 20 yr level term.

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Suze Orman is great for the 35 year old that makes 35K per year, has 7 credit cards, a car payment, a mortgage, no life insurance, and 3 kids at home.  She is very good for people that need serious financial overhauls, not people like most of our clients.  Her disciples DON'T need a financial advisor, they need counseling.  They are people that spend too much, and can't control it.  So yes, term insurance, pay down CC debt, use no-load funds, get your company 401K match, all that stuff.  Good basics, but she isn't really speaking to the higher NW folks. 

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Same with Dave Ramsey.  His version of asset allocation is 1/4 Large, 1/4 Small, 1/4 Mid, and 1/4 International.  That's great for that same 35 year old just starting to invest in his 401K, but not much else.  He does a great job convincing people that the obvious is something new and exciting and worth buying his book to learn.  I've read his book, taken his class ($100), and listened to his CDs.  He's not taught me anything new.  I think his success, probably like Suze Orman, is based on his selling ability and public speaking skills, not the content of his discussions.  If he can get thousands of people to pay his company $100 to take his 12 session class to teach us things we already know, he's the best salesman around.  His website is pure marketing.   
 
I'm not a "Dave Ramsey says" guy.  On this topic of leasing vs. buying he makes some valid points.   That's the only reason I brought him up.
 
 

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With all due respect, despite her crusade to get America out of credit card debt, which is fine by me, Suze is often a moron and a hypocrite.  Dave Ramsey, while usually simplistic, does a lot of good and (1) is OK with paying for investment advice and (2) unlike Suze, is not an annuity basher.  I had a lot of misconceptions about him before I read his book and moderated his 13-week FPU program for a church.  Whenever a client asks for a credit counseling referral for a wayward child who's in over his head financially, I recommend the parent pay the roughly $100 tuition to get the child into the program and usually, get excellent feedback.  Occasionally, the child refuses to stick to the program and fails out.  Sometimes, as Spears says, you can't cure stupid.
 

If your clients are saying "Dave says", you should at least read his book to know what he's REALLY saying.  I've had to correct several misconceptions, such as "Dave says I should withdraw my 401(K) to pay off debt" or "Dave says I shouldn't have a mortgage" or "Dave says insurance is just a waste of money", et al.  Dave says nothing of the sort, but if you don't know what he DOES say, you can't correct your clients.  He's certainly more conservative than I am (other than being fairly bullish on our economy and the stock market) and his message is maddeningly simple, but it works more effectively than just about any personal finance course I've come across.  A few Bible verses won't kill anyone either...there's actually some wisdom in that book for those of you who haven't read it...
 
...and before anyone gets the idea that moderating his program is a good marketing tool, I'll tell you that there is a very strict rule about not approaching any participant in any way shape or fashion with for-profit services.  I don't even tell participants what I do for a living (although it usually gets out during the course of the program).  This is simply community service and a good way to (1) find out what your clients are talking about and (2) give back/pay it forward.
 
Who knows...you might even pick up an idea or two that you find personally useful.

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...and as a business owner, I leased a new car, knocking roughly a third off in taxes...deducting lease payments, insurance, maintenance, gas, plates, even car washes.  I want to present a reasonable image of success and not worry about the car dying on the side of the road when I'm taking a client to lunch.  Dave and I don't agree on EVERYTHING...

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Speaking from a financial POV only the reliability of most cars, American or other, makes leasing the right answer for very few. 25 years ago most cars were buckets of rusty bolts by 50k miles. These days, with some care,  most cars can reliably go twice that distance. Most owners will have only 50k or so by the the time the car is paid off. Then take a break from car payments or another lump sum payment until deminishing returns set in. And that can be years off.
 
Personally, I' ve had great luck with Hondas, getting over 100k miles without any problems on several Accords and Civics. For that matter, without any trips to the shop for anything more than routine maint. Last year I had an 03 Civic in the fleet buy the farm with 117k on the clock. The guy who caused the crash apologized. Still, I had just put $1200 into the car to get it ready for its second 100k of doing 150 miles a day ferrying my younger daughter back and forth to work and school. I got $10,500 from the insurance company. I paid 14k for the car in August of 03. I was out of pocket $3500 plus $1200, to go 117,000 miles. I like that math! And if it had gotten wrecked two weeks earlier I would have saved the $1200.
 
Obvioulsly with the mileage we rack up leasing wouldn't work, but looking at the math of owning these cars that can be driven reliably 100,000 miles or much more, leasing hardly makes sense from a financial POV.
 
 But, then there's passion! Where do I sign!
 
 

Anonymous's picture
Anonymous

Car quality, from a scientific point of view, is not a contestable topic.  Toyota makes the highest quality cars, followed by Honda.  Period.  Better than BMW, better than Ford, better than Ferrari.  From an SPC/TQM standpoint, it's a fact, not opinion....the Big 3 really missed out on Demming/Jung back in the day - Toyota capitalized.

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Icy, I'd say that you can, more than likely, always drive a Honda further than a Toyota....so perhaps the Honda just might be better. The car that lasts the longest, with the most miles, is the best ...in my book.
http://www.autoblog.com/2007/10/01/craigslist-find-of-the-decade-930-000-mile-95-honda-civic/
 

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BondGuy's picture
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It use to be Ford vs Chevy, now it's Honda vs Toyota.
While the quality control experts may say Toyota is better, nothing beats beating the crap out of one to get the real answer. Ok, The only car I beat the crap out of is my Grand Cherokee. I'm still washing mud off it from last weeks's kayaking trip. However, we do put a lot of miles on cars. Our 07 Camry odo shows 28,000 miles on the clock. It's 14 months old. It's been to the shop twice for extraordinary maintenance and it now has to go again. This time for a severe dash rattle. Something has come very loose behind the HVAC/radio stack.
This is the second Camry we've had. The first one was leased and thru 35,000 miles of lease payments it visited the shop a least a half a dozen times in it's short time with us. Something was always wrong with that car. That was 11 years ago and we figured we'd give them another shot. The 07 is better, but it's not up to the Hondas we've owned when it comes to quality.
 
From 1991 to today we've had at least one Honda in the driveway. Today we have two Civics. An 03 DX bought at the same time as the LX that was mentioned in the previous post. it has 60,000 miles on it with no extradinary maintenance. And that's sayin something because ,as a kid car, it's been in three crashes. One of those a borderline total. Still it purrs along without complaint. The other is an 07 LX with about 20,000 miles on it and no shop visits. 6 Accords owned from 91 to 06, one extra shop visit for water in the HVAC system. 5 of those cars never went to shop for anything more than scheduled maintenace.
 
So, we've had really good luck with Hondas and not so much with Toyota. It's unscientific, but as a consumer I'm going to go with my own experience.
 
The R56, Zippy, with 9100 miles on the ODO, goes to the shop tomorrow to deal with the last of the Raccoon debacle. I hope.
 
Joe, Indy can answer, but I saw him riding around town in a Bling Chrysler 300 with smoked windows and 24s. Very Smooth ride!!!

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Anonymous's picture
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Yikes BondGuy,
 
I'm sorry to hear about your bad luck with Toyota.  I wouldn't blame you if you never bought or leased on again.  Sounds like my 350Z - quite an oddity for Nissan (although Nissan is still far lagging vs Toyota & Honda in terms of quality).
 
Charlie - I think driving around and beating the crap out of a car is a very unscientific way to measure quality.  In addition, having the higher quality MOTOR, doesn't mean you have the highest quality CAR.  That's like saying you have the best PORTFOLIO because 15% of the assets are in a top ranked FUND. 
 
Nevertheless, Honda has historically been the champion of the 4 banger - although since Toyota's release of their VVTI-L motors in 2000, they have made BIG strides vs Honda.  Not to mention, I'm pretty sure Honda STILL hasn't ventured to build a V8 motor, while Toyota has two (a 4.7L and a monster 5.7L).  Not to mention, Toyota is developing a VVTI-L 5.0L V10 with a 9,500+ RPM redline for a Lexus supercar meant to compete with the new F430 in the [relatively] near future. 
 
Sorry, I'm veering off topic.
 
BG - Sorry to hear about your unlucky cars.
 
Charlie - Motors aren't the whole story. 
 
PS - My Honda lawn mower does a stellar job - although, my neighbor just blew a rod in his Civic, and asked if he could buy my mower....I think he's planning a motor swap! 

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joedabrkr wrote: BondGuy wrote:
 
Joe, Indy can answer, but I saw him riding around town in a Bling Chrysler 300 with smoked windows and 24s. Very Smooth ride!!!NiceDid it have the neon underbody lights too?
 
Hey, he's Indy, way too conservative for that. Did have the mirrored HIDs up front though.

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BondGuy wrote:joedabrkr wrote: BondGuy wrote:
 
Joe, Indy can answer, but I saw him riding around town in a Bling Chrysler 300 with smoked windows and 24s. Very Smooth ride!!!NiceDid it have the neon underbody lights too?
 
Hey, he's Indy, way too conservative for that. Did have the mirrored HIDs up front though.
 
It is a 300 (limited)...at least you got that part right... red with some nice chrome, leather inside with a sunroof I really didn't ask for but accepted rather than order one.  I think we talked about that one when you were on sabbatical, Joe.  It's no Beemer, Porsche or Ferrari (although it is a half-ass Mercedes...they re-designed it during their ownership of Chrysler from what I understand), but I don't wan the clients thinking I'm screwing them either...

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henryhill wrote:I have owned American cars and they have held up very well ( I traded in my cherokee with almost 200k in miles.)   According to the book, "The Millionaire Next Door"  most millionaire's buy, not lease.I'd argue that most millionaires lease, then buy. That book has it wrong. Out of the millionaires I know, they lease first to make sure they like the car. This way they can test it out for a couple of years and make sure they like it. If they do like it after 2 or 3 years, whatever the lease is, then they buy it out right and own it.

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Insideman wrote: henryhill wrote:I have owned American cars and they have held up very well ( I traded in my cherokee with almost 200k in miles.)   According to the book, "The Millionaire Next Door"  most millionaire's buy, not lease.I'd argue that most millionaires lease, then buy. That book has it wrong. Out of the millionaires I know, they lease first to make sure they like the car. This way they can test it out for a couple of years and make sure they like it. If they do like it after 2 or 3 years, whatever the lease is, then they buy it out right and own it.
 
How many millionaires do you know?  Is it a fair sampling?  I would think the author's of that book did the research.  If the millionaires you know lease then buy, I don't think you'll know too many millionaires before too long.

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I wasn't disagreeing with his answering I was only disagreeing with the processes. Yes: Most millionaires own.But: They lease first and decide if they want to own.

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Insideman wrote:I wasn't disagreeing with his answering I was only disagreeing with the processes. Yes: Most millionaires own.But: They lease first and decide if they want to own.
 
Bullshit.

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In the interest of full disclosure I know 4 millionaires, multi millionaires. My theory holds true for all of them. One leased a MB SL 500 something for 3 years and then wrote a check. Another leased a 7 series for 3 years then bought it out right.        (This one also bought some classic Porsche's outright just to have, so I guess that counts as just a buy)The other two lease Porsche Cayenne at the moment, don't know if they have bought before or if they plan to purchase. I mean think about it, they have say $100K to buy the BMW 7 Series.  They can lease it for 3 years at about $1,000 a month. So, $36,000 for three years. That means that they could take the other $64K and invest it. Assuming 9% returns over the 3 year lease they'd have just under $83,000 when it comes to purchase the car. If you pretend for a second that the 7 series depreciated exactly how much the lease accounts for, that car is only worth $64,000 right? Meaning that the millionaire just made $19,000 off his money instead of pumping it all into a depreciating asset right away.Just my 2 cents.

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Insideman wrote:In the interest of full disclosure I know 4 millionaires, multi millionaires. My theory holds true for all of them. One leased a MB SL 500 something for 3 years and then wrote a check. Another leased a 7 series for 3 years then bought it out right.        (This one also bought some classic Porsche's outright just to have, so I guess that counts as just a buy)The other two lease Porsche Cayenne at the moment, don't know if they have bought before or if they plan to purchase. I mean think about it, they have say $100K to buy the BMW 7 Series.  They can lease it for 3 years at about $1,000 a month. So, $36,000 for three years. That means that they could take the other $64K and invest it. Assuming 9% returns over the 3 year lease they'd have just under $83,000 when it comes to purchase the car. If you pretend for a second that the 7 series depreciated exactly how much the lease accounts for, that car is only worth $64,000 right? Meaning that the millionaire just made $19,000 off his money instead of pumping it all into a depreciating asset right away.Just my 2 cents.
 
Find some more millionaires or multi-millionaires if you're so inclined.  There is some information you are missing and your logic is a little flawed.

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Inside, no arguement with your personal experience. However, your guys don't sound like the typical millionaires found in the study. For example; most of the millionaires studied didn't drive foreign luxury iron. Most drove american cars, with the Grand Cherokee the most owned by the group studied.
 
The study is now somewhat dated, having been done in the nineties. But BMW/Mercedes/Porsche were just as popular back then as today. No reason to think anything has changed.
 
Within my own book of biz, my 5 wealthiest clients drive an Audi A6, Cadillac STS, Lincoln Towncar, Silverado pickup, and an aging Q45. The infinity owner is the richest of the bunch, but loves his ninety something luxo barge.
 
None own the top of the line German metal, even though each could buy a truckload full if they so desired.
 
I found that the book confirmed my experiences with the rich and very rich. What's important to them doesn't come with a steering wheel.
 
Lastly, I do have clients with the fast and or expensive Geramn cars. All are realitively young, 40ish to 50, and none is what I would call truly wealthy. Big income and comfortable, but not there yet.

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I can agree with that. All I was getting at was that they probably Lease first and if they like it cut the check to the dealer.
For the record eveyone I mentioned now owns all their car(s).

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BondGuy:  I agree with your whole post, but as a little note to the comment about Porsche/MB/BMW/etc. being just as popular in the 90's as they are today...
 
In the 1990's, Mercedes/Lexus/BMW/Porsche/Infiniti/Acura had nowhere near the SUV offerings they have now [in North America].  This could be the reason the Jeep was the most common, as the luxury brands really didn't have a competitor (or many competitors anyway) in that class back then.

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I leased my current M5. I get a new 90K luxury car every 3 years, write off 1/3 of the payments, write off tires/gas/car washes. I don't pay for service and always have a warranty. Don't ever own a luxury car out of warranty.   I invest the rest and let the bank take the hit on the depreciation. They depreciate like hell. I also belong to a couple bimmer forums and MOST people lease the high performance M's. Add one more millionaire to your sample that leases.

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Ferris, generally speaking I agree with your reasoning for leasing VS owning. Seems well thought out in your case. One thing though, you are the one taking the depreciation hit, not the bank/leasing company. All lease math includes residual value, the value of the car at the end of lease term. Another term for residual value is depreciated value. The leasing company then throws on a cost of money factor,  profit factor, and a fudge factor, crunches the numbers and gives you a payment. That doesn't include the vig to the dealer. Since most people are so lost on how lease payments are calculated dealers love leasing because their gross profit is almost always much higher.
 
In the rarified air of high performance metal it gets better for the dealers and leasing companies. The dealers make out because the customer has no where else to go to get competitive numbers. Also, very few of the cars in this catagory on the ground at various dealers are optioned exactly the same. That puts a different number on each car making comparison difficult. Also high end customers aren't good shoppers because in many cases they have a personal relationship with a dealer who keeps supplying them their hard to get dream cars. This allows the dealer to hose them. Which some do. The leasing companies, because of the small numbers of vehicles produced, hold a lower residual on these cars artifically inflating the payment. Or they'll change the money factor to increase the payment. This gives them some wiggle room if they've guessed wrong on the residual. Which,by the way, is about as likely as an insurance company guessing wrong about whole life premiums. Once the car comes back to the leasing company the lessee is charged for any damage, excess wear, mileage. In other words, excess depreciation. The leasing company then gathers up all its off lease cars for that month and puts them thru the sale at places like Manheim where they are sold immediately to dealers for a profit. If the leasing company is an arm of the car's manufacturer, BMW Financial for example, the cars are offered at a BMW sale to BMW dealers who sell them as certified pre owned. These dealer sales allow the bank to sell the cars for even more money.
 
So, while all your reasoning for leasing is solid, and meets your needs, one thing you're not doing is beating the depreciation. You are paying for it , with interest.

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Fundamentally yes. But the last car had a residual value that was about $8000 higher than the market value of the car when I returned it.   You're right, there is no way to avoid depreciation, but I think in this case I'm putting a cap on it, a cap that I don't mind. Had I outright bought the car, I would have taken it in the shorts even more. Most of the guys that bought the same year I did on the bimmer forum are lamenting that they should have leased. And by a time value of money, I calculate the total cost of the car during those three years a win for me.

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Ferris, no argument that leasing , for some, is the best alternative. Your decision to lease is well thought out. I too have one leased car. I leased a car for one of my kids. I did for one of the reasons you mentioned, to know all my costs upfront. The rest of fleet is owned. However, no heavy metal in my garage. Right now my weekend driver is an 07 Mini Cooper S. With gas prices being what they are, even having to use premium, Zippy, the R56 is getting more and more daily driver duty. I can drive it as hard as i want and it still gets 30mpg. And it is the most fun I've had with any car for a long time.
 
http://www.youtube.com/watch?V=4DlBQYBQA84
 
One thing, out of curiosity, regarding the market value of the M5? Was there a significant jump in lease payment from your previous M to your current car? It would seem that the big miss guess on residual, no doubt brought about by some outside unknowable factor, would increase the lease payments on the current car. First, because the car now has a verifyible track record of greater depreciation, and second to increase the lessor's comfort factor in the volatile market of high performance cars. 8Gs is a pretty big miss. Of course not as big as full sized SUVs right now. Just curious?
 
Lastly, what forum? I've seen Roadfly, are there others?

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The lease payment was about the same. I found a couple out of state dealers, told them what car I wanted and the lease payment I wanted to make. One of them matched the payment and did the deal.

bimmerforums is a good one.

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indy,
 
What did you lease? Also my cpa says if I lease a car that I can only write off the % I use for business miles. Is this correct. I thought a lease was an above the line expense. All of it.

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btw, i own a lease return certified w/ warranty '03 saab convertible. What a fun and reliable car. My only vice besides plenty of beer are cars, so I don't mind spending money on a different car once I've depreciated from the biz.

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Ah the Saab convertible. Very nice! As is Ferris' M5. Yeah, there a lot of ways for us blow our money. I'm kinda diggin the Mini right now. Just filled it with Premium. 12.127 gallons for a 377 mile run. Not bad considering how much time the tach spends in the upper part of the range.
 
I paid 4.19 a gallon and here in Jersey we have full serve only. The attendant pumping the gas said his idea to get people to quit bitchin about gas prices would be to have young woman in thong bikinis pump the gas. I think he's on to something. Buttttt, I then reminded him he'd be out of a job. Hey, he's pumpin gas for a reason.
 
OK, enough, Saturday awaits!

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