Is Leasing Like Shacking Up?

Michelle Singletary
Thursday, August 14, 2008 10:47 AM

Steve Eber of Eber Capital Management in Coral Gables, Fla., thinks leasing a vehicle is like trying out marriage by cohabitating.

Eber was responding to my recent column, Parking The Leasing Lifestyle, in which I cheer the fact that some U.S. automakers are drastically scaling back their leasing business because it isn't so lucrative for the companies anymore. For example, Chrysler says it's going to "repackage" its auto incentives to make it more affordable for customers to buy rather than lease. GMAC Financial Services, the lending arm for General Motors, plans to reduce the volume of new lease originations in the U.S. GMAC also said it was discontinuing lease incentive programs in Canada.

As I wrote in my column, consumers have foolishly bought the marketing message that leasing makes sense if you have to have a new car every few years.

"I'll grant you that if you know going in that you will own a car for 5 to 10 years, outright purchase, even financed, may be the way to go," wrote Eber, who said he's been a professional financial adviser and money manager for more than 27 years. "However, if you are unsure that you will want the car that long, a 3 year lease...often makes as much sense as living with your boyfriend/girlfriend a few years before committing to marriage."

As someone who is supposed to specialize in wealth creation, Eber is not right on the money about leasing.

And yet he's right to compare leasing to living together.

Only the way I see it, leasing is all about focusing on short-term costs and wants, much like cohabitation. But studies show people who get married tend to be better off financially in the long run than those who live together. Likewise, people who buy a car and keep it for a long time are generally better off financially.

But alas, there were others who agree with Eber. Most of the comments came from people railing against purchasing a car because it's a "depreciating asset."

"I will always try to rent an asset that declines in value and gives me no tax benefit in exchange for my sacrifice rather than purchase it," one person wrote.

Ralph Heimann in Simi Valley, Calif., wrote: "This time I feel real lucky to be leasing. I have a 2006 Tahoe with 16 months left. It is so under water now and when the lease is up, it will be worth $12,000 less than the residual. If I had purchased it, I would be in big trouble."

"You may think it makes more sense to keep a car until it is paid off and driving it around for years makes good financial sense," wrote Eric Thompson, the controller of Valley Auto World in Fayetteville, N.C. "To me, it makes the most sense to never own a depreciating asset, especially one that depreciates as fast as an automobile."

If it were true that you shouldn't buy depreciating assets, why not rent your television, your clothes or your furniture?

I'll tell you why. You don't rent those items because their value doesn't matter if you're going to hang onto them. I've never had to worry about the value of the cars I've owned because I keep them for years. When I no longer want the car, I give it to someone in my family who needs, but can't afford to purchase, a vehicle. I have never had to trade-in a car so it has never been an issue that it's worth far less than when I bought it.

As one certified public accountant, John T. Armstrong of Hampton, Va., told me, "Depreciation is just an accounting term that we use to write off the useful life of the asset's ability to produce earnings. We cannot and should not use this in our personal finances. Our personal assets do not generate revenue and therefore cannot be depreciated."

Need more convincing? Here are two of my previous columns on auto leasing:

* Cars Worth Less Than The Loans (April 29, 2007)

* Your Lease, Your Loss (July 18, 2004)

Finally, one reader had a question about leasing.

Q: Jan McCarthy of Great Falls, Va., wrote: "My husband has recently retired after over 40 years of hard work and would LOVE to own a Porsche. Always has wanted one, never could afford it. But we both think the price tag on cars like this is ridiculous and a waste of good money. I hate for him not to be able to realize his lifelong dream, or to enjoy himself tooling around in a Porsche for a year or two, and suggested he lease one, then give it back after the two-year period. A mistake?"

A: I checked with leasetrader.com to see how much it would cost to lease a Porsche. On this site you take over someone else's lease contract. Depending on the make, model and year, your husband could end up spending anywhere from $600 a month to well over $1,000 a month to lease a Porsche.

Why not have your husband rent a Porsche one or two weekends a year? Do an Internet search for exotic car rentals. (Small Business blogger Sharon McLoone recently wrote about one local company, Capital Dream Cars.) Although renting this high-end car is pricey (on average more than $1,000 for a weekend) it's far less expensive then a lease contract. So at least for a few weekends a year your husband can live out his life-long fantasy of having a head-turning fun ride.

Talk To Me

Struggling to hold on as the bills pile up and the money disappears? Need help? I'm here. Let's chat.

Today, I'll be available to give you advice on basic personal finances. Discussion starts at Noon ET. Submit a question now or later during the chat.

If you miss the chat, you can always read the transcript.

Families In Financial Turmoil

James Brown, who died two years ago, left his estate in a mess. At last count there was 30 lawyers and 10 lawsuits involving Brown's estate. I mean, for goodness sake, he was buried roughly 70 days after his death because of the legal melee.

What's most tragic about this legal fight is the many children he never supported nor recognized during his life. Brown may have been the Godfather of soul but he sure didn't live up to his parental role as far as his children were concerned.

To read more about this mess check out Soul Survivors (Aug. 8) by Post Style reporter David Segal.

An Economic Inconvenient Truth

If you're looking for a summer film may I suggest "I.O.U.S.A" set to debut on August 21? Post reporter Frank Ahrens reports that the movie discusses the tsunami of debt the American public will face because of the national deficit, Social Security entitlements and our trade imbalance.

Find out more about this documentary in Ahrens's article Indebted Ever After (Aug. 7).

Renters Hit By the Housing Crisis

I can't imagine a more innocent victim in this whole mortgage mess than renters.

It seems some people, who have faithfully paid their rent, are now facing disrupted lives and even homelessness because their landlords have defaulted on their mortgages. Often these renters are being forced to move because of a foreclosure without much notice, reports Post real estate reporter Dina ElBoghdady.

Read more in Foreclosure Crisis Catching Renters Off Guard (Aug. 8).

A King Or A Carpenter?

Here are your answers to last week's question: "Does God want you to be poor?"

"God wants me to be the best that I can be, with the tools He has given me," says Jan McCarthy of Great Falls, Va. "More than that, I think that God wants me to share whatever I have, little as it may be, with others; to watch out for my fellow man while I watch out for myself -- and that the reward may be more in my heart than in my wallet, but for me, that's better."

James Parks in Baltimore, Md., wrote: "I believe God doesn't want us to be poor or rich. It's our attitude about money that matters. The world contains enough resources for each person to have what he/she needs. But in our quest for 'more' some folks take more than they need, which means others end up lacking. As you said, it's tragic to drive a Mercedes and not give someone a ride. I believe God would say rather than giving them a ride, sell the Mercedes, buy two hybrids and give one to the person without a car."

"I don't believe for a minute God wants us to be poor," wrote Sue Scott of Oaks, Penn. "Would any 'father' or mother want their children to have anything less than the best? That doesn't mean everything will be handed to us."

"No, God doesn't want me to be poor," says Irene Vinyard Bennett. "God wants me to be a steward of the resources of my life so that no one in my circle of influence is poor," says the American living in Hong Kong, China.

Dave Shehorn in Vancouver, Wash., says, "When you are given the blessings of good health and a wealth of opportunity, you need to recognize that these are gifts by the grace of God. With experience, these gifts can be leveraged to gain a joy of living and they need to be nurtured by the joy of giving."

You Asked

Here are some leftover questions from my July 31 online discussion:

Q: What are your thoughts on having a roommate to share housing expenses? If I own the home and rent out a room -- is that money considered income or contribution towards housing expenses? Do you have examples of contracts for renting rooms/house sharing? I am able to pay my housing expenses, but I live in a "bigger" house now empty nested due to kids moving on and divorce. Does it make sense to get a roommate to help pay down the mortgage? But nervous too about having a stranger in my house.

A: I think it's a great idea to rent out a room or part of your home to earn some extra money. First, you should go online and find a rental agreement tailored to your state. Check out lawdepot.com.

Generally, rent you receive is taxable to you as income, according to the IRS. But you can generally deduct expenses from your rental income. Expenses such as interest, taxes, maintenance, utilities, and insurance can reduce the amount of rental income that is taxed. For more information about the tax treatment of rental income read Rental Income and Expenses on the IRS Web site.

There are special rules relating to the rental of property that you also use as your main home. Make sure you read IRS Topic 415: Renting Residential and Vacation Property. If you rent property that you also use as a home, your deductible rental expenses will be limited.

Clearly the hardest part is finding the right tenant; one that won't be triflin'. So do your homework. Be sure to do a credit check on the potential renter, even if it's someone you know.

Q: I know how you feel about debt, but what about student loans that are locked in at 2.5%? Is it worth paying those off early? I share your sentiment that life is better with no debt hanging over my head but I'm not sure paying off such a low interest rate loan early is smart.

A: Oh right, it's much smarter to hang onto debt like it's a pet. At least a pet gives you pleasure. Whether a debt is at a low interest rate or there's no interest being charged, you still need to consider the risk of having that debt weight. If you lost your job or became disabled you would be grateful for not having to worry about a student loan payment.

Q: My boyfriend and I are talking marriage (Yay!). However, we are also talking finances and he has alluded to some issues with his credit. We called the 3 bureaus for credit reports, and are waiting for the information to come in the mail. I'm willing to work with him to help clear up these issues. Meanwhile, my mind is racing. I have good credit, a mortgage, minimal credit card debt. If we do get married, will his old debt become 'our debt,' specifically will my credit score be affected?

A: Don't worry. When you get married you don't inherit the credit challenges of your spouse. You each keep your separate credit histories. Only joint debt will be listed on your credit report.

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.

Charity Brown contributed to this e-letter.