The debate rages on over renting versus buying a home. Location determines the correct course of action; buying in one city might be a wise financial move, whereas, renting could be better two states over or even across town. Within the same city the best financial course can be different over time.
The debate of buy versus rent is heavily discussed with home buying because of the huge investment. At the end of each discussion someone always says they prefer owning (or renting) so the “best” financial move is not always the course chosen.
What surprises me is how the discussion never moves to other major purchases. Automobiles, for example, are a major investment and are significantly worse expenditures because the car will go down in value, whereas, real estate tends to rise in value, following inflation trends.
Buying a new car might be a good idea with all the current incentives and, in some cases, massive tax credits for electric vehicles. In the cases involving vehicles with tax credits you need to consider your personal tax situation. Generally, tax credits of this kind are non-refundable, meaning you need a tax liability to reduce before the tax credit has value. State credits also play strongly into the decision. For the rest of us, purchasing a car should not be a simple “yes, I need one” decision.
A Tale of Two Employees
Let me introduce you to two employees in my office who saved thousands of dollars and untold grief due to a minor consultation with The Wealthy Accountant, aka, the boss. We will start with Tabatha. (She recently was married so give her a shout-out next time you see her.) Earlier this summer she had a road trip vacation planned with her fiancé and family. She owns an old Jeep perfect for getting around town, but not reliable for long trips. The mileage sucks and the vehicle is old. The limited miles driven locally make a newer vehicle a poor financial decision unless the Jeep dies.
The scramble was on to find a vehicle for their vacation. At first she considered upgrading to a newer vehicle with the higher insurance and depreciation costs involved. For a 21 year old woman, the goal is to keep expenses low and pack as much away into investments as possible. A newer vehicle would be contrary to her plan.
The conversation around the office did not include your favorite accountant until I overheard my team discussing the issue during a break. With my usual finesse I interjected my opinion.
My argument: Buying a newer car will cost $200 or more per month in payments or lost opportunity cost, and insurance will be more expensive. You only need the newer car for two weeks.
My suggestion: Rent a vehicle for two weeks and pay for it with your credit card.
My reasoning: Since Tabatha will need a loan on a newer vehicle she will be required to carry more insurance than necessary. By renting, the car will be delivered to her home and if the car breaks down along the way, you call the rental company and have them bring you a new car. No repair costs, no depreciating vehicle, no oil changes. Only fill it with gas and you are ready to go. I had two additional recommendations. Check with you regular car insurance to verify your car insurance extends to the rented vehicle and check with the credit card company to learn how much auto coverage is automatically included if you pay for the rental with the card. This negates the need for insurance at the rental company.
Tabatha rented the car for just over $200 per week and had no problems. She was able to get a larger vehicle so they could travel with fewer cars (her fiancé’s parents also drove their car) and carry more supplies (food, so they did not eat out as often). Insurance was covered at no additional cost by the credit card company.
Dawn of a New Day
Last month another employee, Dawn, had a similar situation. Her car was fine for around town, but the transmission is touchy and a long trip could leave her stranded. Around town a car issue means a quick call to a friend or family member. On the road it is a major problem! Dawn recalled the Tabatha situation and asked my opinion. It was the same. Her one-week vacation included a $200 car rental fee without the risk of her personal car dying. She doesn’t need another bill and a forced vehicle purchase is not in the cards.
Why Own a Car?
The story of Tabatha and Dawn started me thinking about auto ownership. When does it make sense to own a car? I live in a rural area. A car is a necessity to get anywhere. The same applies to the open areas of the American West. But living in town is a different story. Living close to work is ideal and should be a goal. By living close to work, most of your driving needs disappear; a bike or walking handle that.
The few times you need a car in town are handled cheaper in two ways: Uber and a rental car. One-time, across town trips are relatively cheap using Uber. Longer trips should utilize a rental car. Now the decision is when do you own a car versus renting.
Is there ever a time when renting a car full-time is cheaper than owning a car? I am talking about never owning a car, but having a rental car in your driveway every day. Let’s run an example to find the breakpoint.
To find the breakpoint where renting a car every day is cheaper than owning, we need to figure the full cost of car ownership. I tend to buy used vehicles and run them for forever and a day. I like to buy cars a few years old when a large part of the depreciation is off, but the car still has plenty of life in her. To keep this simple I will use a $20,000 vehicle for our example. I understand you can get a used car for a lot less, even a two year old one. The math is for illustration purposes only.
Car: We need to make some assumptions when we consider the cost of the car. For our example we will assume you paid $20,000 for the car and in five years you want to upgrade to a newer car. The value of the car in five years is $7,000. Monthly cost of depreciation: ($20,000 – $7,000)/60 = $216 (I rounded down.)
Insurance: Insurance costs are all over the map and depend on where you live. I am going to use $100 per month.
Repair/Maintenance: This includes brakes ($400), oil changes ($750), and tires ($850). We will include some miscellaneous maintenance (light bulbs, windshield wipers, et cetera) of ($500). The costs listed in parentheses are the five year cost. Monthly miscellaneous auto costs are: ($400+$750+$850+$500)/60 months = $41 rounded down again.
Our example considers no bank loan on the car. We also will assume your rental car is paid by a credit card that includes insurance and pays 2% cash back.
The breakeven point for renting a car over owning in the above example is: $216+$100+$41 = $357 per month.
Renting the same car for $400 per month covers all repair issues, upfront cash or a bank loan, insurance from the credit card company, and $8 cash back from the credit card. The rental company can swap out cars every so often to handle oil changes, regular maintenance, and car washes. If there is ever a problem you call the rental company.
Renting is still more expensive and renting a car for $400 per month might not work, but the example illustrates the thought process before we move forward.
Where It Will Work
There are two situations where the above example will work. If you are buying a new car every few years the depreciation costs are higher. Also, in certain areas insurance costs can be very high and could change the formula radically. Loan interest is also a consideration if you don’t pay cash for the auto purchase.
Swapping full-time auto ownership with a rental car probably does not work. But, what if you are retired or semi-retired? If you drive only a few times a month, Uber probably is cheaper and you get the driver for free. Renting a car (or truck if you have a project) for periodic travel needs makes renting a viable option.
My goal is not to convince you to rent a car over owning. I want you to consider additional options that are better financial choices when spending your hard earned money. Today’s discussion covered cars, but you can easily use the template offered on any major purchase. Building a deck requires tools you may only use once. Borrowing or renting is a lot smarter than buying in those cases. My final recommendation: Always bring a calculator. Your phone already has one built in.