Should You Buy or Lease?

April 13, 2006

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If the major purchase you're considering is a car, truck, or some fairly standard office equipment, you may want to consider leasing your equipment rather than buying it. Leases for standard equipment are easy to arrange with suppliers and, in fact, there's a great deal of competition in that business, so you may be able to whittle down the costs even further. However, be aware that leasing will frequently cost you more in the long run.

If the project you're considering is a new office, store, warehouse, or other business facility, leasing the facility from the owner may also make sense at first, until you can afford to buy it. Actually, almost anything can be leased, even specialized production equipment, store fixtures, and custom-constructed real estate, although these kinds of deals are more frequently arranged through third-party financing companies.

The starting point for your decision-making is, once again, the projected cash flow statement you've worked up showing the dollar benefits of the project, and the costs under the options you're considering (in this case, leasing vs. purchasing).

Then, evaluating whether it's better to lease or to buy can be easily done by performing a net present value analysis of your cash flows under both alternatives, and comparing the results you get. The alternative with the lower NPV will be the cheaper alternative in the long run. However, factors other than cost may influence your decision as well, and you should consider the advantages and disadvantages of leasing.

As a very rough rule of thumb, leasing is often cost-effective for items like cars, computers, and other equipment that decrease in value over time, and will be used for about five years or less. With property that will be used for more than five years, the long-term cost of leasing will often be greater than the cost of purchasing the asset.

With property that will increase in value over time, such as real estate, leasing should be considered a last resort for those who can't afford to purchase. Owning appreciating business property is the key to long-term wealth.