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Terminology:
Equity The difference between the value of an item and the amount still owing on it. For example, a $100,000 home that has $40,000 still owing on it, the owner has $60,000 in equity. In other words, the owner owns part, and the bank owns part of the house.
Lease A contract for purchasing the use of property, such as a building or vehicle, from another party, for a specified period of time. If you lease something, you have no equity in the item. This means that once the lease period is over, the owner of the item takes possession.
2.4 Buy, Rent or Lease?
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Appreciation the increase in value of an asset over time. (1 + percentage in decimal form)
Depreciation the decrease in the value of an asset over time. (1 percentage in decimal form)
Appreciation and depreciation affect the value of a piece of property and should be considered when making decisions about renting, buying, or leasing.
Each situation is unique, so it is impossible to generalize whether renting, leasing, or buying is best. A cost and benefit analysis can help make this decision.
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Example: Josh is a chiropractor and works 6month contracts in Nunavut from July 1 to December 31 every year. He has two options for housing. Is one better?
i) He can rent a room with a kitchenette at a hotel for $85 per day, which includes cleaning service, utilities, and a phone.
ii) He can take a 6month lease of a furnished apartment for $1800 per month. This requires the first and last month's rent up front, along with a refundable damage deposit of $1800. As well, Josh would need to pay utilities and phone at about $150 per month.
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Example: Josh is a chiropractor and works 6month contracts in Nunavut from July 1 to December 31 every year. He has two options for housing. Is one better?
i) He can rent a room with a kitchenette at a hotel for $85 per day, which includes cleaning service, utilities, and a phone.
ii) He can take a 6month lease of a furnished apartment for $1800 per month. This requires the first and last month's rent up front, along with a refundable damage deposit of $1800. As well, Josh would need to pay utilities and phone at about $150 per month.
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Example : A new car that is bought for $25,000 depreciates in value 25% every year. What will be its resale value in 4 years?
Method #1 (Chart)
1234
Value Start of Year Depreciation Value End of Year
$25,000
Method #2 (Compound Interest Formula)
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Example : A new car that is bought for $25,000 depreciates in value 25% every year. What will be its resale value in 4 years?
Method #1 (Chart)
1234
Value Start of Year Depreciation Value End of Year
$25,000
Method #2 (Compound Interest Formula)
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Example: A new RV Camper is bought for $39,500 depreciates in value by 30% every year. What will be its resale value in 5 years after it is bought?
Example: A $80,000 tractor depreciates by 18% each year. What is the resale value in 10 years?
Example: A $385,000 house appreciates in value by 2.2% each year. What is the price of the home in 6 years?
Example: A $120,000 cottage appreciates in value by 3.4% each year. What is the price of the home in 8 years?
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Example: A new RV Camper is bought for $39,500 depreciates in value by 30% every year. What will be its resale value in 5 years after it is bought?
Example: A $80,000 tractor depreciates by 18% each year. What is the resale value in 10 years?
Example: A $385,000 house appreciates in value by 2.2% each year. What is the price of the home in 6 years?
Example: A $120,000 cottage appreciates in value by 3.4% each year. What is the price of the home in 8 years?
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Example: A company requires computers, a server, and printers. The company's technology policy requires upgrades and renewals every 4 years because the value of computer equipment depreciates at an annual rate of 40%. The costs of purchasing and leasing are shown in the chart below. Note: they can sell the equipment after 4 years if purchased, but at the reduced value.
Equipment Lease ($) Purchase ($)
computers 1115 per year 4875
server 2000 per year 6500
printers 90 per year 1160
a) Analyze the costs of leasing versus purchasing.
b) Would it be better for the company to purchase or lease? Explain.
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Ex (1) Brad and Greg are looking for places to live.
Brad decides to rent a house for $1100 per month.
Greg buys a house for $198,900 with a down payment of 5%. The bank has offered Greg a 25year mortgage for the remainder of the cost at 4.15% compounded semiannually, with payments every two weeks.
Brad and Greg both move after 6 years. Greg's house has appreciated by 1.5% per year.
Compare Brad's and Greg's housing costs.
Section 2.4 ContinuedGraphing Calculators
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Ex (1) Brad and Greg are looking for places to live.
Brad decides to rent a house for $1100 per month.
Greg buys a house for $198,900 with a down payment of 5%. The bank has offered Greg a 25year mortgage for the remainder of the cost at 4.15% compounded semiannually, with payments every two weeks.
Brad and Greg both move after 6 years. Greg's house has appreciated by 1.5% per year.
Compare Brad's and Greg's housing costs.
Section 2.4 ContinuedGraphing Calculators
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Ex (2) A company has spent $45,000 for car rentals over 2 years. The company wants to determine if it should continue to rent or if it should buy or lease two vehicles instead.
A new car costs $21,000. A 5% down payment is required. The rest can be financed at 2.9%, compounded monthly, for 2 years. Assume depreciation of 40% a year and monthly payments.
A 2year lease for a car requires a down payment of $2500 and monthly payments of $520.
Determine the costs of each option: renting, buying, and leasing.
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Ex (2) A company has spent $45,000 for car rentals over 2 years. The company wants to determine if it should continue to rent or if it should buy or lease two vehicles instead.
A new car costs $21,000. A 5% down payment is required. The rest can be financed at 2.9%, compounded monthly, for 2 years. Assume depreciation of 40% a year and monthly payments.
A 2year lease for a car requires a down payment of $2500 and monthly payments of $520.
Determine the costs of each option: renting, buying, and leasing.
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