debt (lease) and invest more vs. no debt (cash buy) invest less

[Joe Kim]

I have an interesting question.   It relates to the questions many people who have asked this question:

Pay off existing debt vs. using that money to invest....it's a popular question.

What about a twist on that question:

Car lease vs. Car purchase?

Car lease is akin to renting a home.

Some have made the argument that instead of buying an expensive home (let's say in California), it's cheaper to rent than buy (due to very low rent to value ratio).

For example.  if rent costs to $3000/month but costs $900,000 to buy.  that's a rent to value ratio of 0.3%...much lower than the 1% or 2% rule if you were looking for a rental property.

So instead of spending $900,000 to buy a home that you can rent for $3000, you can invest the $900,000 to buy rental property that produces rental income.  (like 9 x $100,000 at $1000/month rent and $700 cash flow x 9 = $6300/month)  that effective pays for rent and money leftover

Now most people don't have $900,000 in cash.    So let's say 20% or $180,000 is available for cash for downpayment on your primary or spend $180,000 on buying rental properties.   

$20,000 downpayments for 9 rentals ($100,000) financed with $300/month cash flow.  or $2700/month cash flow which almost pays for the rent of $3000 on you primary residence.

So the reason for this mental exercise is what about a fairly expensive car purchase  (MSRP $48000)

Scenario #1

1) Lease :   $3000 downpayment and $600/month for 36 months at 12,000 miles/yr

total cost:  $24,600

2) Financed:  $5000 downpayment.  0.9% rate.   Monthly payment $810.93/month.   Total costs: $50,295.26

3) Cash buy:  $48,000 - $2500 rebates - $1000 discount + $5000 (taxes/fees) = $49000 total cost.

Scenario #1 Lease gives the best opportunity to spend $49000- 24,600 (total lease cost) =25,000 for IRR of 20%

If you can apply the cash to a good investment, return is much higher than being in less debt.