Own for two years - the lease vs buy math

[dckiwi]

I recently took delivery of my S75D about a month ago. At the time I had to decide between the 2 year lease or buying the car.

I'm in line for an M3, so I *may* end up trading in this car in two years or possibly less. The AP2.0 announcement has made this even more likely.

Here's where I'm confused. I made the decision to buy because - according to my math - it seems to make much more financial sense. However, most people say 'lease if you're keeping the car for 2-3 years'. Here's my math - can someone let me know what I'm missing?

The 'out the door' price of my car was $73,216.25. This includes $9,700 in discounts ('showroom' discount for brand new car, referral credit, waived destination fee, and federal tax credit). Basically what I paid out of pocket.

Lease:

Due at signing: $10,375.75 (VA sales tax + registration + leasing fees + $6,000 down payment)
Monthly payment: $695

Total cost to own (2 years): $27,055.75

Buy:

The total cost of ownership is entirely dependent on the resale/trade-in value in 2 years. Here are some scenarios:

$55,000: $18,216 total cost of ownership
$50,000: $23,216 total cost of ownership
$45,000: $28,216 total cost of ownership
$40,000: $33,216 total cost of ownership

So - as long as I can sell this car in 2 years for at least $45,000, I come out either the same or ahead of leasing. Now, I know that *no-one* can predict resale values, especially with AP2.0 (and soon M3) out in the wild. But I am a low mileage driver (less than 1,000 miles a month). I also expect the eventual expiration of the tax credit to help used Tesla sales.

Don't you think it's a fairly safe bet that this $73,000 car could go for $45,000 in two years? If so, what am I missing in the lease vs buy argument?

 

[fallen888]

Perhaps I missed it, but you're not factoring in remaining balance of your loan - whatever is left after two years of monthly $695 payments.

So I'd crunch your numbers again for the same term length of lease and financing.

 

[dckiwi]

Perhaps I missed it, but you're not factoring in remaining balance of your loan - whatever is left after two years of monthly $695 payments.

So I'd crunch your numbers again for the same term length of lease and financing.

I'm not sure that my loan balance makes any difference. As it happens, I owe $55,000 on my loan. But that doesn't change the fact that if I buy the car for X and sell it for Y, my total cost of ownership will be X-Y, whether I have to loan to pay off or not.

And of course, the remaining balance on my loan will be less than $55,000 in two years (closer to $36,000).

 

[carter_seattle]

@fallen888 he never said anything about a loan. I think the assumption is that he paid cash up front.

@dckiwi one thing you're missing is that many people don't pay cash, so loan vs. lease terms matter. You're also betting that you know more than Tesla about future resale value, which is unlikely.

Ultimately leasing and buying are almost the same, with some important differences depending on the state you live in and your tax situation.

 

[dckiwi]

@carter_seattle - I presume loan vs cash makes a difference because of the interest paid on the loan? If so, that's fair enough. However I have a $55k loan at 1.5% from Alliant. Over two years, I'll pay ~$1,000 in interest (rest goes to principal). You're right that I should add that $1,000 into the total cost of ownership of buying, although it still doesn't make much difference in my case.

 

[mspohr]

You'll be paying a high cost to keep the car for just two years. Leasing is more expensive because the leasing company has to factor in the risk of greater depreciation and they have a higher cost of money plus their profit.
It's a bad deal either way.

 

[dckiwi]

You'll be paying a high cost to keep the car for just two years. Leasing is more expensive because the leasing company has to factor in the risk of greater depreciation and they have a higher cost of money plus their profit.
It's a bad deal either way.

I get that keeping a brand new car after two years is not the frugal way to go. This thread is about lease vs buy if you decide to do that.

 

[RocketGoBoom]

I think the best deal is to buy a Tesla coming off of a 2 year lease, drive it for years 3 and 4, then sell it back to Tesla to buy another Tesla coming off of a 2 year lease.

Be upgrading every 2 years to a 2 year old Tesla with 24,000 miles on it.

I think that will be my plan going forward or something like that. I will drive my next Tesla (Dec 2016) till 2020, then "upgrade" to a 2018 Tesla.
The big depreciation hit is in those first 2 years of the original lease.

I realize this is OT to the OP's discussion. Just thought I would chime in with my sort of plan to take advantage of the leased cars in the future.

 

[dckiwi]

PS @carter_seattle mentioned that it may depend on the state you live in. I think this is impacting my situation as well - in Virginia you pay the full sales tax amount ($3k) whether you buy or lease.

 

[mspohr]

I get that keeping a brand new car after two years is not the frugal way to go. This thread is about lease vs buy if you decide to do that.

I believe I covered that in my answer.
Leasing is always more expensive.
(However, you're throwing away so much money by getting rid of the car after two years, the difference between leasing and buying is just a small part of the waste.)

 

[carter_seattle]

Leasing is not always more expensive. I am leasing a 2013 Nissan Leaf and due to how they (mis)calculated the residual I am coming out WAY ahead after 3 years.

 

[mspohr]

Leasing is not always more expensive. I am leasing a 2013 Nissan Leaf and due to how they (mis)calculated the residual I am coming out WAY ahead after 3 years.

Manufacturer subsidized leases (intentional or not) can be cheaper.

 

[outie]

Leasing is not always more expensive. I am leasing a 2013 Nissan Leaf and due to how they (mis)calculated the residual I am coming out WAY ahead after 3 years.

Leasing is always more expensive for Tesla because it's not heavily subsidized like other auto makers (MB/BMW).

For a 2 years comparison it's probably a wash. We all know a new car depreciates at an accelerated rate in the first years.

 

[PhatCat]

A loan and a lease are simply different methods of financing; neither is inherently cheaper or better. In a loan the purchaser holds the title and pays the lender interest at a pre-arranged rate for the privilege of using its money until the term is complete, at which time the lender releases its lien and the purchaser owns the car outright. In a lease the lessor holds the title and the lessee pays the lessor both interest and for the declining value while driving its car until the term is complete, at which time the car is returned to the lessor.

The important difference between the two is that cost for a loan is simply computed as the financing cost on the entire purchase price of the vehicle (less downpayment). The cost of a lease comprises two components. You pay for the depreciation of the car over the time you drive it, which is the difference between the purchase price and a pre-agreed residual value set by the lessor, which represents the anticipated value of the vehicle at the end of the lease. And you also pay financing on this amount less any up front payment (capital cost reduction). The lessee has the option to buy the vehicle at the end of the lease for the residual value but is not required to do so. Sometimes this amount is negotiable at lease end.

Manufacturers sometimes subsidize the residual value to a value higher than actual anticipated trade-in, lowering the lease payment. Luxury manufacturers have higher profit margins and thus have more room to do this. This can make a lease cheaper than a loan, enabling drivers to "get into" cars at a lower payment than they could afford on a loan.

The general rule is that if you want a new car every 3 years or so, leasing is a good way to go because it saves the hassle of trade-in. This is especially true if you can get a lease with an artificially high residual value since you would be unlikely to get that trade-in had you purchased. Be mindful that the bulk of depreciation on cars occurs in the first 2-3 years--especially so on luxury cars-- so you pay quite a premium to rotate cars that frequently whether you purchase or lease.

I generally purchased my cars with cash when I could, unless the program was offering 0% (or very close) since free money is always good. Even putting it in a savings account you come out slightly ahead, let alone investing it at a real return. I keep my cars in great condition and was able to sell or trade them easily at the KBB values over many years. However since the great recession when dealers' profits shifted to used cars, i have found the trade-in process to be truly odious. Most dealers offer below the auction value and you have to go to multiple dealers to get anything close to "trade-in" value. They nick you for excess wear and tear on lease turn in but not nearly as bad.

In contrast, I have leased my two most recent vehicles--the 2016 ELR and 2016 S75D. Not only did I get really good lease deals with high residuals but this technology is also changing very rapidly. This means a lot of uncertainty in the value of these cars in 2-3 years with almost all of the price risk being to the downside. The ELR has already been discontinued (expected but still love the car). The residual on the 2 year Tesla MS lease struck me as unreasonably high during the EoQ blow out, given that the M3 should be in full production in two years, which I would expect to soften the demand for the lower end MS. Little did I know that just three weeks later the AP2 announcement would hit. No doubt that the residual on the lease is way too high now but that is the bank's problem.

Everyone's situation is different but my recommendation is that with things changing so rapidly in EV technology, if you can snag a great lease deal take it so that you can jump on the newest tech sooner without worrying about trading or selling your "outdated" car. If you're happy keeping your vehicle for 8-10 years, you're better off paying cash except when you can find 0% financing.

 

[mspohr]

A loan and a lease are simply different methods of financing; neither is inherently cheaper or better. In a loan the purchaser holds the title and pays the lender interest at a pre-arranged rate for the privilege of using its money until the term is complete, at which time the lender releases its lien and the purchaser owns the car outright. In a lease the lessor holds the title and the lessee pays the lessor both interest and for the declining value while driving its car until the term is complete, at which time the car is returned to the lessor.

The important difference between the two is that cost for a loan is simply computed as the financing cost on the entire purchase price of the vehicle (less downpayment). The cost of a lease comprises two components. You pay for the depreciation of the car over the time you drive it, which is the difference between the purchase price and a pre-agreed residual value set by the lessor, which represents the anticipated value of the vehicle at the end of the lease. And you also pay financing on this amount less any up front payment (capital cost reduction). The lessee has the option to buy the vehicle at the end of the lease for the residual value but is not required to do so. Sometimes this amount is negotiable at lease end.

Manufacturers sometimes subsidize the residual value to a value higher than actual anticipated trade-in, lowering the lease payment. Luxury manufacturers have higher profit margins and thus have more room to do this. This can make a lease cheaper than a loan, enabling drivers to "get into" cars at a lower payment than they could afford on a loan.

The general rule is that if you want a new car every 3 years or so, leasing is a good way to go because it saves the hassle of trade-in. This is especially true if you can get a lease with an artificially high residual value since you would be unlikely to get that trade-in had you purchased. Be mindful that the bulk of depreciation on cars occurs in the first 2-3 years--especially so on luxury cars-- so you pay quite a premium to rotate cars that frequently whether you purchase or lease.

I generally purchased my cars with cash when I could, unless the program was offering 0% (or very close) since free money is always good. Even putting it in a savings account you come out slightly ahead, let alone investing it at a real return. I keep my cars in great condition and was able to sell or trade them easily at the KBB values over many years. However since the great recession when dealers' profits shifted to used cars, i have found the trade-in process to be truly odious. Most dealers offer below the auction value and you have to go to multiple dealers to get anything close to "trade-in" value. They nick you for excess wear and tear on lease turn in but not nearly as bad.

In contrast, I have leased my two most recent vehicles--the 2016 ELR and 2016 S75D. Not only did I get really good lease deals with high residuals but this technology is also changing very rapidly. This means a lot of uncertainty in the value of these cars in 2-3 years with almost all of the price risk being to the downside. The ELR has already been discontinued (expected but still love the car). The residual on the 2 year Tesla MS lease struck me as unreasonably high during the EoQ blow out, given that the M3 should be in full production in two years, which I would expect to soften the demand for the lower end MS. Little did I know that just three weeks later the AP2 announcement would hit. No doubt that the residual on the lease is way too high now but that is the bank's problem.

Everyone's situation is different but my recommendation is that with things changing so rapidly in EV technology, if you can snag a great lease deal take it so that you can jump on the newest tech sooner without worrying about trading or selling your "outdated" car. If you're happy keeping your vehicle for 8-10 years, you're better off paying cash except when you can find 0% financing.

Good discussion of the issues.
I would say that I have found leasing to be more expensive since the leasing company generally has a higher cost of money, has to accept the risk of the residual and has to add in their profit.
However, in this case, selling a new car after two years will lead to an incredible depreciation loss which overshadows any much smaller difference in lease vs buy. If you know that you are only going to have the car for two years, it would make much more sense to by a CPO pre-AP 2014 car where someone else has already taken the hit on the first two years depreciation and the advance in technology. In the next two years, the depreciation will be much less, leaving much more cash for the new purchase.

 

[Gig103]

I appreciate that you shared your numbers. I have to say, being that I have leased before, there are two pros that aren't covered in a "total cost" analysis.

First, is that with a lease you can get gap insurance and if the worst case happens and you are in a total loss, you don't have to worry about your insurance company lowballing you, or worse yet trying to rebuild 49% of your car because of some threshold. Gap insurance ($250 on my Audi lease, I have no idea what it goes for on a Tesla) plus the $6000 down, and you're clear.

Second, is that selling a used car is a pain in the butt, so the lease walkaway is painless (as long as you're under your miles). In fact, I've sold my last two cars to Carmax because while their price wasn't great, it was easy. Tire kickers and lowballers are annoying enough with an ICE, I can't imagine how much more faux-interest I'd encounter with an exciting car like a Tesla. And with higher value used Teslas will run (you hope $45k), comes the need for people to arrange financing which can lead to delays, backouts, etc.

 

[S4WRXTTCS]

I'm a little confused because it was my understanding that the $7500 federal tax credit wasn't applicable to a lease. At least in terms that you yourself won't get the $7500 tax rebate if you lease.

The other bad thing about a lease is it's REALLY hard not to put miles on this car. Or at least it is for me with the combination of how easy it is to drive long distance along with the free superchargers.

 

[dckiwi]

I appreciate that you shared your numbers. I have to say, being that I have leased before, there are two pros that aren't covered in a "total cost" analysis.

First, is that with a lease you can get gap insurance and if the worst case happens and you are in a total loss, you don't have to worry about your insurance company lowballing you, or worse yet trying to rebuild 49% of your car because of some threshold. Gap insurance ($250 on my Audi lease, I have no idea what it goes for on a Tesla) plus the $6000 down, and you're clear.

Second, is that selling a used car is a pain in the butt, so the lease walkaway is painless (as long as you're under your miles). In fact, I've sold my last two cars to Carmax because while their price wasn't great, it was easy. Tire kickers and lowballers are annoying enough with an ICE, I can't imagine how much more faux-interest I'd encounter with an exciting car like a Tesla. And with higher value used Teslas will run (you hope $45k), comes the need for people to arrange financing which can lead to delays, backouts, etc.

Both good points. On the resale process, my plan was just to trade-in to Tesla. Has anyone else traded in with Tesla and if so how was the experience?

 

[sdorn]

I'm a little confused because it was my understanding that the $7500 federal tax credit wasn't applicable to a lease. At least in terms that you yourself won't get the $7500 tax rebate if you lease.

The other bad thing about a lease is it's REALLY hard not to put miles on this car. Or at least it is for me with the combination of how easy it is to drive long distance along with the free superchargers.

When I leased my Nissan Leaf they applied the $7,500 tax credit that the leasing company gets (because they are the ones actually "buying" the car) as a capital reduction on the lease and it lowered my payments.

On one other post I saw on TMC, they mentioned that the source code on the Tesla lease calculation page actually adds the $7,500 back to the residual when calculating the lease cost, so that would effectively get you to the same place if it is true. I haven't confirmed that for myself.

 

[u00mem9]

The entire 'lease if you are only keeping it for 2 years' thing is the same kind of interweb wisdom that brings us nuggets like 'get all the options so your car will be worth more at resale time'. Mostly, it is just people incapable or unwilling to do the math.

Be aware that the tax on leases varies by state and can shift the math significantly. The other factor that can have a big effect is leasing as a business expense. Based on what details you have provided, I think your conclusion is correct. Good luck convincing the rest of the internet