Section 2.4 Buy, Rent or Lease? Asset an item or a portion of an item owned, also known as property. Such as houses, vehicles, and land. Appreciation increase in the value of an asset over time Depreciation decrease in the value of an asset over time Disposable income the amount of income that someone has available to spend after all regular expenses and taxes have been deducted. Example : Vehicle Depreciation A new car that is bought for $25, 000 depreciates in value 25 % every year. What will be its resale value in 4 years after it is bought? Year Value at start of year Depreciation amount Value at end of year 1
A new RV Camper is bought for $39, 500 and it depreciates in value by 15% every year. What will be its resale value in 5 years after it is purchased? A $80 000 tractor depreciates by 18 % each year. What is the resale value in 10 years? A $385 000 house appreciates in value by 2.2 % each year. What is the price of the home in 6 years? A $120 000 cottage appreciates in value by 3.4 % each year. What is the price of the home in 8 years? 2
When deciding whether to rent, buy, or lease, each situation is unique. Since each situation is unique, it is impossible to generalize whether renting, leasing or buying is best. A cost benefit analysis should take everything into account. Costs include the initial costs and fees, short term costs, long term costs, disposable income available, cost of financing, depreciation and appreciation, penalties for breaking contracts, and equity. Benefits include convenience, comfort, safety, personal wants and needs. Appreciation and depreciation affect the value of a piece of property and should be considered when making decisions about renting, buying, or leasing. Lease A contract for purchasing the use of property, such as a building or vehicle, from another, the lessor, for a specified period. If you lease something, you have no equity in the item. Equity The difference between the value of an item and the amount still owing on it. It can be thought of as the portion owned Example: If a $25 000 down payment is made on a $230 000 home, $205 000 is sill owing and $25000 is the equity of portion owned. 3
HOUSE RENTING rental deposit on top of 1st month rent monthly utilities cable fees limited access to laundry (usually in basement of building) not responsible for maintenance, lawn mowing or snow removal pets sometimes not allowed. BUYING legal fees house inspection and water tests property taxes insurance responsible for maintenance building equity (ownership of property) Can make changes down payment 4
CAR Leasing legalling binding agreement sets out terms and conditions for using a new vehicle for a defined period (24, 36, or 48 months typically) pay for use of vehicle you don't own at end of lease term, the car is returned to the dealer or you can purchase at an agreed upon price when you lease a car you only pay a portion of the car's value. In contrast, when you own a car, payments go directly to the total cost (price + interest) In short term, leasing will cost less than buying the longer the term of the lease the higher the carrying cost and less attractive it becomes. if you intend to lease car for more than 3 years, better choice to buy. lease limits the number of km you can drive. Anything over this amount leads to stiff overcharges. If you terminate the lease before contracted date, you pay penalties. If involved in an accident or stolen, insurance pay out may not be enough to cover balance left on lease. required to follow maintenance schedule Buying ownership builds equity (you can sell in future). can drive as many km. make changes to car. 5
Mary has been hired to complete at 16 week work term in White Rock, about 50 km from Vancouver. She is considering three options Rent a room in a bed and breakfast in White Rock for $400 per week. The cost would include all utilities and meals Lease an apartment in White Rock for $1200 per month. She must pay first and last months rent up front, plus a refundable damage deposit of $2000. She also needs to pay about 200 per month for all utilities Buy a used car for $12000 on credit, with regular monthly payments of $1000 and interest at 3.2 % compounded monthly. She would live in Vancouver with her parents for free and commute to White Rock daily. Driving costs such as gas, insurance, and maintenance would be about $250 per week. The car will depreciate by 20 % each year Which option would you advise Mary to choose? 6
Example: 1. Tom is considering buying a lawn mower. He can hire someone to cut his grass for $50 per cut. He can buy a new tractor for $2200 or he can buy the same lawn tractor used for 70% of the purchase price (2 years old). Tom cuts his grass on average 20 times per year. Which option is best? Explain. (Forget gas and maintenance costs) 2. Heather bought a house for $195 000. She negotiated a mortgage of 80% of the purchase price of the home. What is the value of the mortgage? 3. Heather is putting a 20 % down payment on her house she bought in the question above. What is the value of the down payment. 4. Grant bought a boat for $8950. A 5% down payment is required. What is the value of the down payment? 7
8
Attachments Martensmath.docx Chapter 8 Assignment 1.docx Chapter 8 Assignment 2.docx Chapter 8 Assignment 3.docx Independent Study ANS.pdf Independent Study Booklet.docx