Here is Everything You Need to Know About Lease vs. Buy Analysis

Have you ever thought of the ways you can acquire real estate or high-priced assets like vehicles, jewelry, art, etc? You can inherit it, receive it as a gift, or purchase or lease it.

However, people often get confused between leasing and buying a real estate property or valuable assets.

Let's understand the difference between lease vs. buy analysis, with an example.

Sam has owned a white colored Honda City for the last 5 years. He keeps the car with him 24/7 and uses it for personal and professional work. Although Sam owns the car, he never has to pay for any repair work required. Charlie is responsible for financing all the repair and maintenance work of the vehicle.

Maya has also owned a Honda City for the last 3 years. Just like Sam, she also keeps the car with her 24/7, driving it everywhere she goes. However, she's responsible for all the repair work required by the car.

What's the reason behind Sam having to bear no repair costs while Maya personally finances all the repair work?

Maya has purchased the car, whereas Sam has leased it.

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What is Leasing?

You can understand leasing as a financial agreement involving two parties, the lessor and the lessee.

The lessor is the lender who allows a user to use their assets or real estate property for a fixed period. In the example mentioned above, Sam is the lessee (the user), whereas Charlie is the lessor (the lender).

In a lease arrangement, the lender allows the lessee to use the asset for a fixed period in exchange for a specific period while still owning the legal ownership of the asset.

Hence, even though Sam keeps the car 24/7 and pays the rental charge, Charlie has legal ownership of the vehicle, making him responsible for the repair work.

There are two main types of leasing arrangements, namely, operating leasing and capital leasing.

1. Operating Lease

An operating lease is most commonly used for real estate, vehicles, and machinery/equipment. It is a short-term lease agreement where the user acquires ownership of the asset for a fixed period and has limited rights over the asset.

Once the operating lease contract period ends, the lessee does not have the option of purchasing the asset legally.

When businesses and corporate offices sign operating lease contracts for real estate, machinery, etc. they consider the lease payment as an operating expense. As a result, they do not have to mention this in the ledgers as a liability.

In reference to the example mentioned above, Sam signed an operating lease contract with Charlie. Sam had limited rights over the vehicle, making Charlie (the owner) responsible for incurring all the costs associated with the vehicle.

2. Capital Lease

A capital lease is a long-term lease agreement in which the user (lessee) has significant rights over the asset, automatically responsible for incurring all the costs associated with the asset.

If Sam had signed a capital lease agreement with Charlie, he would have been responsible for all the repair and maintenance costs of the car.

Once a capital lease agreement ends, the lessee has the option of buying the asset from the lessor (lender). Unlike an operating lease, capital lease finances appear as a liability in the lessee’s ledger and balance sheets.

What is Buying?

In the lease vs. buy analysis, unlike leasing, buying is not a financial agreement. The owner here acquires and buys the product/asset/service in exchange for money.

The process of buying applies to both tangible and non-tangible things like real estate, vehicles, software, online content, etc.

Key Differences Between Leasing and Buying

Leasing

Buying

Ownership

The lessee (user) has the right to use an asset in exchange for periodic payments to the lessor (lender)

The buyer has full ownership of the asset in exchange for payment of the acquisition price

Rights

The lessor (lender) retains the ownership rights of the asset, and the lessee (user) cannot modify and dispose of the asset without the lender’s approval

The buyer has full control over the asset and the right to use, change, and dispose of the asset as they see fit

Duration

The financial lease agreement can be both long-term (capital lease) and short-term (operating lease)

No financial agreement is required; the buyer/owner can use the asset as long as he/she wants

Purchasing

The lessee (user) does not have the option to purchase the asset at the end of the operating lease agreement

The ownership rights always remain with the buyer

Cost

The cost of the lease is seen as an operating expense in the income statement and ledgers

The cost of the purchase is seen as a liability on the balance sheet and depreciates over its time

Maintenance

The lessee does not have the responsibility for the upkeep or repair of the asset

The buyer assumes the responsibility and accountability for the upkeep and repair of the asset

Lease vs. Buy Analysis: Pros and Cons  

There is no universal answer to if leasing is better or buying. Each person has their requirements which might be better fulfilled by either of the two.

To help you make an informed decision, we have discussed the pros and cons of leasing and buying in detail.

Advantages of Leasing

Mentioned below are some of the advantages of leasing:

• Leasing requires lower upfront costs as compared to buying an asset. While buying an asset, the buyer will cover the whole payment at once or make a down payment.
• While leasing, the down payment is usually the first month’s rent and a much lower security deposit.
• With leasing, you can switch to a new agreement or asset as soon as the agreement ends. You are not bound to a singular asset with a long-term commitment.
• You have the flexibility to upgrade according to evolving needs and trends.
• With monthly lease payments, you can easily and accurately manage and predict your monthly expenses.
• If it's an operating lease agreement, you won’t be responsible for the maintenance and repair costs of the asset. This is a significant cost-saving method and can lessen the stress related to property ownership.
• You can simply recognize the lease payments as operating expenses in your accounting books for tax benefits. Unlike a buyer, you will not have to showcase it as a liability.
• Leasing significantly improves cash flow because instead of purchasing, you can save your cash and free up funds for other investments or expenses.

Disadvantages of Leasing

Leasing can also have some limitations and disadvantages, such as:

• As a lessee, you can utilize the property for your needs, but you do not own the property. Hence, you cannot make significant or permanent changes to it as and when required. You will always be required to acquire permission from the lender.
• While monthly lease payments might be lower than monthly mortgage payments, the total cost of leasing can be higher in the long run.
• The lessor can raise the rent at the end of the lease term, which can result in higher monthly payments and strain your monthly budget and expenses.
• Unlike a buyer, leasing does not offer the possibility of appreciation or a return on investment. All your payments go towards the rent of the property rather than building equity.
• The lessor can always choose not to renew the leasing contract. There is great uncertainty associated with leasing agreements.

Advantages of Buying

Some of the benefits associated with buying an asset are:

• If you buy an asset like a real estate property or machinery, you have the right to ownership. You can sell, rent, or lease the property as and when you see fit.
• As you make payments on a mortgage or as the property appreciates over time, you build equity in the property. This can offer a source of financial guarantee and a significant potential for a return on investment.
• Unlike leasing, you have complete control over the asset you own and can make any changes or improvements to it. This can be particularly advantageous for those who want to personalize their asset for numerous professional or personal reasons.
• When you buy and own an asset, you have the option to pass it on to your heirs or sell it for a high profit. This can be an important source of wealth accumulation for the future generations of your family.

Disadvantages of Buying

Some of the disadvantages of buying an assert are:

• The upfront costs, like initial downpayment, closing costs, legal costs, expenditures, etc., can be significantly high. If you are on a budget, your savings can take a big hit.
• When you borrow money or take up a loan to buy an asset, you will be required to pay interest and fees on the loan. This can raise the overall cost of ownership and reduce your return on investment.
• When you own an asset, you are responsible for its regular maintenance and repair. This can be costly and extremely time-consuming, especially for large assets like real estate property. This can also lead to increased mental and physical exhaustion.
• When you purchase an asset, there is always a probability and risk of loss. The value of an asset can diminish, and there is no guarantee that you will be able to sell it for a good profit margin in the future.
• The value of assets, especially real estate property, can fluctuate greatly based on market trends and conditions. This can result in significant losses for those who buy at the wrong time.
• If you own multiple assets at once, it can be difficult to properly manage all of them at the same time. This can lead to costly mistakes or wasted opportunities.

Lease vs. Buy Analysis - Narrowing it Down

If you're still confused about which one would be best for you, here are some factors you can consider while making a final decision:

1. Costs and Expenses

The costs and expenses related to buying and leasing vary significantly. Make a decision after calculating all the expenses related to:

• Type of asset
• The required duration of the ownership
• Rent and lease agreement of the asset
• The purchasing cost of the asset

2. Responsibility

When you lease an asset, the lessor will be responsible for the maintenance and repair. Whereas when you buy an asset, you are responsible for maintenance and repair, which can be costly and time-consuming.

If you have multiple assets, it can be extremely difficult to look after and maintain all of them at once. For instance, assets like real estate property require regular care and upkeep.

3. Financial Goals

If your goal is to build wealth through ownership and appreciation, buying can be a better option for you. If you are more focused on flexibility and avoiding large upfront costs, leasing can be a better choice.

4. Tax Liabilities and Benefits

If you lease, you can recognize the lease rental merely as an operating cost in the ledgers, whereas when you purchase an asset, it will be seen as a liability in the ledgers.

In some cases, there may be tax subsidies to owning an asset, such as loan interest deductions or property tax deductions. Therefore, it is crucial to consider the potential tax benefits when making your decision.

5. Flexibility

Leasing offers more flexibility as you can return the asset or upgrade to a newer model as and when required or when the lease term is up.

However, when you buy an asset, you are committed to it for the long term and may not be able to upgrade or sell it as easily and quickly.

Closing Thoughts

Last but not least, the choice between leasing and buying an asset depends on your requirements, financial condition, and goals and objectives. It's important to carefully consider all the factors before making a final decision.

If you need help, consult a financial advisor or reach out to us at Hubler to make an informed decision. We are a unique and efficient SaaS product company helping businesses, corporate offices, and enterprises manage their business process quickly and effectively.

We offer various solutions, including lease management, assets management, expense management, vendor agreements, supplier risk management, and much more.

Reach out to our expert team now and get started.

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