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  • Vehicle lease vs buy, new vs used (a doctors dilemma)

    My intent is for this thread to serve as a repository of information and opinions on the pros and cons of different ways to finance vehicles. There are a multitude of ways to pay for vehicles and a variety of issues that arise with respect to high income individuals.

    I'll start with my current predicament:

    My current car is a 12 year old BMW with 92 thousand miles. It's been reasonably reliable but things are starting to wear down and when they need fixing, it tends to be close to 1k per visit to the mechanic, depending on the issue needing to be fixed. I've enjoyed my car, but found out during my ownership tenure that i don't really care about the car i drive as long as it gets me from point A to point B, is reasonably comfortable, and above all else is reliable (See link below) . My plan is to replace this vehicle with a reliable Japanese sedan at some point over the next calendar year before my current car hits 100,000 miles and becomes a money/time pit.

    My self proposed budget is 25k which I think will buy a moderately equipped new or used Honda accord which should work well given my priorities.

    Among the options I'm considering:

    -Paying cash for a gently used car and driving it for 7-8+ years (supposedly the least expensive option, but by how much in the 20-30k price segment of vehicles?)

    -Paying cash for a new car and driving it for 10+ years ( but NOT until the "wheels fall off"...I think my time is too valuable to be stranded on the side of the road commuting to work)

    -Leasing a new car with purchase at the end of the lease term if I like the car ( no major reliability issues arise)

    -Leasing a car and continuing to lease cars with the option to write off a portion of the payment in 2 years when I have the option to buy into my practice as a partner.

    I bought my current car at auction for 25k 9 years ago and when I add up the cost of non- routine maintenance over the last several years the total cost comes out to $264 per month averaged over the 9 years of ownership. (25k initial purchase+$3500 in repairs= $28,500) That figure doesn't include the $100 full synthetic oil changes, brakes, tires, and the 50¢ per gallon difference for the required premium fuel.

    Right now I'm leaning toward leasing (under good terms) just to be free of maintenance issues and the time suck that comes with fixing them.

    I'm also just out of training and would be able to divert more savings towards a house down payment while we rent an apartment for the first year. (Fortunately I am free of the enormous student loan burden that affects so many recent graduates)




    Other related discussion topics may include:

    As docs transition into retirement and are withdrawing from accounts in the 25-33% tax bracket, does it still make sense to pay for cars with cash? Does a lease become a favorable option as a retiree given the tax implications?

    How much is your time worth? If you're having to miss x number of clinic/surgery hours dealing with car maintenance issues, what does that lost time cost you?

    As a doc who owns his own business, do the business write off implications favor leasing for certain types of vehicles? (See link below)

    For those that make the argument that leasing gives you the latest safety features, is there any data to support this? ( new safety features= less chance of bodily harm if in an accident)


    A few helpful links I've come across:
    Vehicle reliability database:
    http://longtermqualityindex.com

    Buy vs lease as a business owner:
    http://blog.turbotax.intuit.com/tax-tips/buy-or-lease-your-new-business-vehicle-67/

    Please chime in with your thoughts, experiences, and opinions

  • #2
    I do a hybrid.

    I've never been a big fan of used cars and while I understand they are the best way to go (financially), I've decided a new car is where I'll splurge and I'll apply frugality to other areas in my life.

    One of our cars is a new Japanese sedan in the same 25 - 35k range and we plan on driving that anywhere from 5 - 10 years depending on its reliability (at 5 years now with zero issues)

    Our other car is a lease. While I am not a partner, I still deduct a portion of the payment as an employee (actual expenses of vehicle since I'm using the lease payment) since I have a home office (telemedicine) and traveling from my home office to other clinics should qualify as business mileage not commuting. (Clearing the 2% floor tends to minimize the helpfulness of the deduction. Of course, that all depends on how much you are spending/month...)

    I'm actually leasing a BMW:

    - they tend to have favorable lease terms (at least compared to other luxury brands we were looking at)

    - they have an optimal maintenance schedule (1x/year, I can't tell you how much I appreciate this over having to spend my weekend lining up for scheduled maintenance at 7AM every 3 months)

    - value my time very highly since I'm in a high paying specialty and try to avoid missing clinic at all costs (although it is worth noting my 5 month old BMW has broken down more times than my 5 year old Honda...)

    - and since I've paid off my student loans with the only remaining debt being a mortgage < 30% of what I pull in annually, I've decided to splurge by opting for a new leased vehicle every 3 years

    Comment


    • #3


      As docs transition into retirement and are withdrawing from accounts in the 25-33% tax bracket, does it still make sense to pay for cars with cash? Does a lease become a favorable option as a retiree given the tax implications?
      Click to expand...


      Once I became a partner, many years ago, I have always leased through the practice. My other partners do the same, and we all have driven high end vehicles over the years.

      For my kids, I have purchased used vehicles, but for my wife we have generally purchased new or last year a demo vehicle. I know, it's not ideal , but I have to keep the wife happy!

       

      Interesting question about what is the best option in retirement. I guess in some part that depends on interest rates and lease terms.

      Comment


      • #4
        A few thoughts:

        • The article on buy-v-lease was written in 2007 so be aware that amounts are revised upwards (but not by much!) Still a pretty good article comparing the two.

        • Your vehicle expenses must be "ordinary and necessary" to qualify as a business deduction. Commuting does not count, whether you lease or buy.

        • If the lease-purchase is done by the business (rather than by the taxpayer), the business must calculate personal use and add back to the employee's W2. This calculation favors the employee.

        • You can take an additional $8k "bonus depreciation" on "luxury" vehicles, which brings the maximum first year allowance to $11,160 in 2016

        • If you plan to keep your vehicle more than 3 years, cents per mile often yields a better deduction over the long term. The more you drive for business and the longer you keep the car, the better.

        • If you change out every few years and/or don't drive many miles for business, go for actual expense even if you use the car over 50% for business.

        • Certain vehicles with a GVR between 6k and 14k pounds qualify for a section 179 deduction of up to $25k in the year of purchase. You must use the vehicle at least 50% for business.

        • You can take section 179 on leased property (not just vehicles). If you use it for leased software and equipment, you can actually end up with a deduction in year one that is a net positive (more than what you have paid out of pocket).

        • If you are making a decision strictly based upon dollars over the years, it almost always better to buy than to lease. However, I appreciate that you are also considering the value of your time and peace of mind, which could tilt the scales toward leasing.

        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

        Comment


        • #5
          I also lease a BMW as I find their lease support programs quite attractive compared to other manufacturers. It's more expensive but not by much. I previously bought a used Honda accord and drove it for 14 years with an annual cost including maintenance and depreciation of around $170/month. Getting a new accord and keeping it for 10 years I also calculated numbers similar to yours in the mid to high $200s per month with a bit of extra risk in depreciation if you were to have an accident on the car's record, have an unlucky major repair expense etc. Compare that to leasing, where I currently pay $404 a month for a well optioned BMW 3 series and managed to get a pretty good deal. It's more expensive for sure, but it is also a fixed expense. All maintenance including oil changes, a rattle that I find annoying, and even yearly windshield wipers is all included. Plus it's an objectively much nicer car for me. I can afford the $100-200 a month extra pretty easily and enjoy the luxury of a car that I enjoy driving to work everyday. So yes, I lease. But I think it's important to at least be aware of what your costs are and make a conscious decision whether that fits your own values.

          Comment


          • #6
            I think you need to decide how long you want to drive a car. If you've decided that your goal is to drive it from 0 miles (or 20K miles) to 100 miles, then I think buying makes sense. If your goal is to drive a car that is never older than 3 years, then a case can be made for leasing at times, especially if the lease can somehow be run through a business.

            If you want the least expensive option and want something that will get you from point A to point B, then I think driving cars from 100K miles to 200K miles is the best option. That second hundred thousand miles is dramatically underpriced in my view. Probably because there are lots of folks who think, like you, that a car with 100K miles on it is unreliable. A car with 100K miles on it has problems like one of the window motors doesn't work, or it burns a little oil, and the paint is dinged from a shopping cart and one of the stereo speakers buzzes. But it's still a long way from unreliable in my book. Now, I could be convinced of the unreliable issue at 200K miles I suppose, but that's very different from 100K miles.

            All that said, if you enjoy driving a new/nearly new car and can afford to do so, then by all means do so. But I find the unreliable argument for doing that to be fairly weak.
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

            Comment


            • #7
              Thanks for all the replies. Good stuff.

              I’m not sure that most cars are reliable up to 200k miles. I think the reliability data linked above (while not perfect) bears this out. Up to 100k miles I think most vehicles are reliable without any significant powertrain issues if properly maintained, but between 100-200k miles is where most cars find the end of their usable lives. There can also be significant variations in reliability depending on the make/model/platform. Unlike the Japanese, the Germans haven't quite figured out how to make a bullet proof reliable car.

              Most readers of this board can afford to drive (within reason) any car they want. I personally don't get any satisfaction from driving luxury brand cars anymore than a Japanese family hauler. I totally get it for those people who prefer to splurge in the area of vehicles, but for me, I'd rather conserve funds here in order to divert resources towards things I actually enjoy.

              I certainly agree that there is significant value in driving a used car from 100k-200k miles if you don't mind the occasional headache. There is also significant value in eating ramen noodles for dinner every night but not everyone does it. I think most people that value their time and that are highly compensated for it (docs) aren't looking for the cheapest possible mode of transportation. For those that choose to go that route, more power to you. I'm personally willing to pay the relatively small premium to avoid the “hassle factor” associated with high mileage/ questionably reliable vehicles, although I really don't want or need a new car every 3 years.

              As for my car, it's doing fine for now, but 5 years ago the mechanic told me the AC compressor was getting close to the end of its life (a ticking $$$ time bomb), I spent $1500 3 months ago for a new radiator/cooling system overhaul, the transmission/engine suffered $700 worth of an oil leak 3 years ago but has been good ever since; for how much longer I'm not sure (my check engine light has been on for the last 20,000 miles). There's a myriad of other “issues” I've been ignoring that don't really bother me like a failed pump for windshield wiper fluid, broken fog lamp, cracked windshield, and the list goes on) Needless to say this is the last German make I'll be purchasing outright.

              Anyone have any rules of thumb for when to call it quits on your current high mileage vehicle? One I've read says “when the cost of yearly repairs equals the cost of new car payments” unfortunately some of these rules of thumb don't include the “time=money” factor of getting said repairs fixed.

              Comment


              • #8
                It's all about how you define reliability. If reliable means that you won't have to do a major repair every couple of years, then sure, replace your car before anything major can go wrong. Personally, I think a car is reliable even if I have to take it in every couple of years and drop a grand or two on it. Unreliable is when you are going outside to turn the key and have serious doubts that you might not make it to work because it hasn't 2 of the last 10 times. I had a friend's car in college I borrowed that was like that. Turn the wheel too far and it would quit. Come to think of it...that was a german car too!

                An AC compressor is hardly a "ticking time bomb." So what if it goes out? Roll the windows down until it's convenient to take it in and drop a few hundred bucks and get it replaced.

                I understand that people want to avoid the "hassle factor" but I think if they actually added up the price of the hassle, they would realize that they're spending tens of thousands to avoid spending thousands. It's not like there is no hassle involving in going to buy a new car or taking it in to the dealership when there is an issue. I've had way more hassles with my brand new boat in the last year than both of my 175K mile SUVs combined.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

                Comment


                • #9
                  I used to let the car tell me when something was needed as well. This just isnt very convenient or a good strategy at all. Take your older car in regularly, once a year or whatever, get it checked out and keep on top of it. Older vehicles will need more maintenance, that should be obvious, but theres no need to make them pop up all surprise like and ruin your day. Things may still happen, but it should be much less than if youre being proactive about it.

                  I was a bit annoyed that every time we took in my wifes car it was like 1200 dollars. But, that was only 3 months of what her payment was back when she bought it, and it wasnt going every 6 months or anything, just annually. Even a new car has some maintenance and you can think of the upfront cost or payment as just an up front version of that.

                  Comment


                  • #10
                    I think it also comes down to how much you value your time and what subspecialty you're in. For some of the shift work type specialties (ER, hospitalist) there is ample time to go get these things fixed during normal business hours on one of your off days or weeks. For others that have 8 to 5 clinic or surgery every day Monday through Friday, it's not quite as easy to get car issues taken care of without a significant disruption to your normal schedule.

                    Let's say you're a highly paid surgical subspecialist making 400k per year. I'll make a few assumptions to simplify the math (please correct me if I'm way off here with assumptions of your own).
                    - You own your own practice so when you take off, no money is coming in.
                    -4 weeks of vacation (48 work weeks per year).
                    -You're in an outpatient based subspecialty and take no hospital call
                    - you work 8 to 5 Monday through Friday (40 hr work week)
                    -you're a doctor not a “car guy” and you get no satisfaction out of performing your own car maintenance

                    Your hourly rate is $208/hr (400,000/(40*48))

                    You drive a car with 150,000 miles that needs to see the mechanic/service center on average 4-5 times a year (brakes, tires, routine maintenance, oil changes, plus the big ticket items when stuff breaks)

                    You get your oil changed 4 times a year and each trip to the drive through oil change place takes an hour including getting to and from your home (4hrs).

                    You have to go to the shop 1 extra time during the year outside of getting your oil changed to have something fixed (timing belt, spark plugs, fluid leak, etc). This one takes a little bit longer, we'll call it 2 hours of time to be conservative (2 hrs).(It's been days for me in the past getting some things fixed, waiting for parts to get ordered/labor, etc)

                    You spend $750 per year on all the above maintenance costs combined

                    Your total cost in time and money is now (($208/hour* 6 hrs) + ($750)) = $1998 or $166/month

                    Now given the example from the post above if you leased a BMW 3 series for $404 per month, you still have to go into the shop once per year to get the thing serviced with a synthetic oil change, and whatever else bmw wants to do to the car (who cares, it's not yours) That trip cost you 1 hour of time.

                    So for routine maintenance your costs (time+money) to keep the vehicle running are:

                    High mileage vehicle: $1998
                    Leased BMW: $208

                    Looking on auto trader today, it looks like you can get a 2012 Honda accord with 102,000 miles for $11,693. Assuming that car lasts through 200,000 miles at approx 12,000 miles a year that's 8 years. (11,693/8 years)= $1461 per year to operate.
                    (I'm ignoring resale value because there's a limited market for hyper-mileage vehicles and it's going to cost you a significant amount of time to get that beater sold to a private party)

                    Your yearly costs to operate the BMW lease are (208+(12*404))= $5056
                    Your yearly costs to operate your high mileage Japanese sedan are (1998+1461)= $3459

                    So a difference of $1597 or $133 per month is the approximate premium to pay for driving the lease, having peace of mind that your car won't leave you stranded, and making the vehicle you drive someone else's problem. (I'm also ignoring the tax write off implications if the lease is run through your business due to added complexity in calculations)

                    This exercise is more for me than anybody else. Anyone think my numbers are way off?

                    Comment


                    • #11
                      Arent shops open on the weekend? And cant your SO or someone else take the time to get the maintenance taken care of, certainly many places will send someone to pick up the car or you just drop it off before work and get a loaner, pick it up after work that evening or the next. Its not that difficult.

                      Its not that big a hassle. Now Im not suggesting a 100k mile car or anything, mine is a 2013 coming up toward 30k miles, but I'll be having my wife drop it off soon for its scheduled check up, so I wont really notice anyway. Now if you're single just drop it off before work and pick it up after, an extra 20-30 minutes to a single day. Since you dont see pts in the hospital your days are pretty sweet and this can be done before the hospital docs are halfway done rounding.

                      I dont really get the hand wringing over an accord vs. lexus, you can overpay or get a good deal on both, it really depends on the specifics. Also, even a nicer car should be a very small part of your income, and not something worth worrying too much about. If an extra 10k on a car breaks your life plan you probably cant afford the first 10k in reality.

                      Comment


                      • #12
                        Man, I had a car that barely worked and was in multiple organ system failure.  (As an example, the cloud of smoke from the burning oil was handy to help shade the car because the windows didn't roll down and the AC hadn't worked in 5-6 years.)  I got a new car so that I could safely drive on the highway for one of my hospitals but eventually donated the beater to charity for a $500 deduction.  I still have the "new" car which now is pushing 150k...yeah, there are times when it is out of action for a $2k repair job, but it is still my daily commuter.  Now...I did just buy a new car with cash and will likely repeat the situation again...and again.  Obviously, I vote for "buy" and "new" since I plan on driving til not able/safe.

                        Comment


                        • #13
                          Bart I just bought a brand new Honda Accord for $22000 after my $1000 trade in I got for my 14 yr old Honda Accord. So if that's your vehicle of choice and 25k is your budget you're good to go. Make sure you get on truecar.com and price the car you want in your area. If it is an accredited dealership they have to match the truecar price. Whatever you buy don't do it without looking at truecar first.

                          Comment


                          • #14
                            I refer to these articles frequently when making the case for a certified used vehicle.

                            http://mobile.nytimes.com/2013/09/21/your-money/car-leases-grow-more-enticing-but-no-less-expensive.html?referer=

                            http://www.nytimes.com/interactive/2013/09/21/your-money/To-Buy-or-to-Lease.html

                            Comment


                            • #15
                               

                              There's no dilemma, IMO. Buy a reasonably priced car that you can buy with cash. There is great subjectivity to "reasonably priced" but little wiggle room with the "buy with cash". If you are making $1M per year and sitting on a $10M nest egg, I strongly recommend buying something that would bring you pleasure, if cars make you happy. I sure as ************************ would not be driving a beater under those circumstances. The fact is, I make less and have less so I am content to drive a 5 year old Prius.

                              I do not believe in driving a car into the ground. Once it starts having issues, be it 5 years, 10 years, or 15 years, I quickly get rid off it and move on. I do not enjoy taking cars for repairs (my time is too valuable) and need to know that when I turn the ignition, the car will with great certainty take me to my destination. (A wise person once quipped, "If there is a Rolls Royce in your garage and you can't get it to start, it's just an expensive POS!")

                              In my state, we have personal property tax that we pay annually on our vehicles, based on the value of the current vehicles that we own. On the rare occasion that I get the notion of upgrading a vehicle just for the heck of it, I remind myself that I will write a larger check to the Collector of Revenue in December, rather than the smaller check that goes along with owning a depreciating vehicle.

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