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.
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.
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.
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.
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.
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
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
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
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
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
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
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.
Mentioned below are some of the advantages of leasing:
Leasing can also have some limitations and disadvantages, such as:
Some of the benefits associated with buying an asset are:
Some of the disadvantages of buying an assert are:
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:
The costs and expenses related to buying and leasing vary significantly. Make a decision after calculating all the expenses related to:
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.
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.
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.
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.
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.