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Hey everyone, i'm new to the Board, but been following for years. I used to have an E39 M5, and now I have a 2011 M3 coupe 6-speed. I love it, and the whole 'softer' M3 vs. the E46 M3 thing goes away after about a day or two. It's incredible!
Anyways, in light of the new M5 coming out, I thought I'd share something I wrote for some friends regarding why leases can be much smarter than buying. (I'm a tax attorney with a finance/accounting degree, so excuse any technicalities.) Leases get a bad rap, and with these cars, i think they are superior in many cases (I learned the hard way by purchasing my E39 used and paying repair bills / depreciation)
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First off, leases do NOT make sense for most people. The majority of people should buy, not lease, since most people (a) want a Japanese-made commuter to hold onto for 10 years & make cheap repairs, (b) don’t drive high end cars that have high repairs after a warranty runs out, or (c) won’t use all of the lease miles. These people should keep buying cars every 10-15 years.
HOWEVER, Leasing makes a WHOLE lot more sense than buying IF you like expensive and/or high-repair cars, drive a lot of miles, like to get into different cars every 2/3 years, and don't have cash to buy outright (to avoid the interest).
Here's why in order of most importance:

1. Unlike buying, you make payments on only the expected depreciable amount between purchase price and the expected value at lease term (the “residual” offered by the dealer). So your payments are about 50% as much as if you bought it, allowing you to get into a nice car without tying up a whole ton of cash flow. This is even better if you get a good deal, such as a demo model, since the residual % is based on the MSRP, not your sales price which can be $10-$15k less. With a demo on a $100k MSRP car, this makes it possible to have lease payments under $1000/month rather than $2500/month if you bought…I just saw a brand new 2010 M5 like this.

2. This might be better than (1): The depreciation risk is allocated to the manufacturer with a lease. For example, a $100k car that you get a 60% 36-month residual means you make payments of principal/interest on $40k. If the car is worth less than $60k at lease term, you don’t owe a dime! With ownership, however, you bear all the depreciation risk. This is why it’s important to get a high residual! Most of the time the car is worth less than the residual since the dealer wants to make money in the front end at its expense on the back end…all of this is money you saved from leasing rather than buying.
3. You only pay sales tax on the depreciation amount, rather than the full amount if you buy for. Why pay 10% sales tax on the full amount of the car? Also, with a lease, the taxes are spread over all of your payments, not up front.
4. Related to (1), if you buy, you have to wait until you sell to reap the benefits of equity - why give the dealership an interest-free loan until then? It’s better to make the minimum payment, or just the depreciable amount plus interest, but own no equity at the lease term. A car is a depreciating asset – never put more money into it then you have to, unless you don’t think you can get more by investing the money. This is rare, since auto interest rates are so low. Thus, make the minimum payment under a lease.
5. You can sell the car to anyone while you are in the lease, and the numbers work out exactly the same as if you bought it. Most people think you are locked into a lease, but the lease payoff is actually just like you financed the car (only made less principal payoffs since lease payments are based on the depreciable amount, not the full value).

6. You are under warranty and have a brand new car. For high end cars, after warranty expires your repairs can average $200-500 a month depending on how much you drive. There is a great peace of mind knowing you are the only owner and within warranty.

7. With a lease you can drive a performance car hard (redlines, burnouts, etc.)…without worrying about owning it and paying repairs after warranty.
 

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You say that people that drive a lot of miles should lease. Can you expound upon that? I drive anywhere from 12-20k a year because of work and I worry about hopping into a lease that is at 10k/year with X amount per mile over. However, I do love to change up cars every 2-3 years so leasing is definitely in my favor in that regard.

Thanks for the awesome post man :)
 

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Discussion Starter #4 (Edited)
With a lease, you pay for the depreciation, whether you use all the lease miles or not. So don't lease if you won't use the miles. In terms of going over, BMW has a great rate (i think its 20 cents a mile). I would rather pay the lease payments and an extra $4,000 for 20k miles over the initial 30k (for a total of 50k when the warranty expires), than drive a used M5 between 50k-100k miles and incur heavy maintenance/repairs/depreciation, all the while worrying everytime you punch the gas or take a corner hard if something is going to go wrong.

With the BMW lease, you have the peace of mind that, with one monthly payment, you are the only owner, its under warranty, and the only thing you have to pay for is tires. It's a tremendous feeling.

I don't keep my leases until the end, so i don't pay the mileage overage. I do a 3 year lease, then right before the 50k warranty expires (usually around 2-2.5 years), i sell to a private party or trade in the car for something else. The amount you owe to BMW is (a) cap cost (purchase price), less principal payments made for each lease payment.

For example, quick and dirty, in a 3 year lease, each year you pay principal of 1/3 of the difference between cap cost and residual. So if you buy a 80k car with a 50k residual, you are paying off 10k of principal each year. After 2 years, you owe BMW 60k. If your car is worth 55k when you sell early, you owe BMW 5k (but no mileage overage, wear and tear, etc.). You can even roll this into the next lease/purchase.
 

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thanks for the great explanation. you're absolutely correct. it's just a shame that some people hold such a social stigma against leasing.
 

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Awesome! Thank you very much quikguard. I was always wanting to lease, but just extremely worried about the overages/wear and tear/etc. That explanation helps a lot. Now to wait until I see some nice lease deals on M3s... hiha
 

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This is great. I have one question though. I've heard that most dealers will require you to make a large down payment when you lease. Somewhere in the range of 5 to 10 thousand dollars. Is this true? Is it possible to do a lease with $0 down payment? How likely would it be to get into a lease with $0 down payment?
 

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Good Information

Good information, I have often thought about leasing. I purchased a 2006 M6 around 2 yrs ago and of course I am in still paying off the loan. I did however purchase an extended warrenty and maintenance package. I paid for the extended warrenty upfront and later purchased the maintenance package later before the regular 50k/4 yr warrenty ended.

Thanks.
 

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BMW (in the U.S.) offers 10,000, 12,500 and 15,000 mile per year leases. If your drive grossly over 15,000 miles per year, leasing may not be the best for you. I have a 2011 528i on order (for my wife, no, the M6 is not going away) and she will drive 17,000 per year so we are planning on some buying extra miles now rather than all at the end of the lease as you usually get a discounted rate on then if you don't wait until the very end. However, when you are 6 months away from end of your lease, you can still buy overage miles at a discounted rate.

And the "disposition fee" (lease turn in charge) is waived if you roll into another lease with BMW Financial Services. I only paid a deposit on my very first lease with BMW FS back in 1999 and have not paid a deposit since (on my last 4 leases). I will have unused miles when I turn in my 2008 Mini CLubman and I will get a credit for them which will be applied to my 528i lease.

My wife and I are both self-employed so we can write off the business use of the vehicles as current expenses. Personal miles of course are taxable (so the total annual expenses are prorated based on the business/personal mileage split).

Like quikguard said, leasing is not for everyone, but for some it's the best deal going.
 

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This is great. I have one question though. I've heard that most dealers will require you to make a large down payment when you lease. Somewhere in the range of 5 to 10 thousand dollars. Is this true? Is it possible to do a lease with $0 down payment? How likely would it be to get into a lease with $0 down payment?
You can get $0 if you have good credit, and there are no high down payment requirements
 

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That is the most succinct yet thorough explanation of leasing I have ever seen. I am actually sending the link to a friend who posed the question to me last week. Thanks and welcome to the board! :applause:
 

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My first lease was back in 1990 when leasing wasn't a very popular option. People looked at me a little strange for the fact that I was basically "renting" a car for 3 years. I have leased several cars sinse then. But one thing to keep in mind is that the monthly lease payment also includes the lease fee. Their equivalent of an APR for a purchase. Seems to me that this fee has gone up over the years. Back in 1990 there was a significant difference in the monthly payment between a lease and a purchase and seems as though that gap has closed over the years. And the difference is this fee. Residual back then is residual now as long as the dealership is calculating it (or estimating it) accurately. The only time I put any money down is when the payment was more that I wanted so I put money down to get the payment to what I was looking for. I also typically turned in my leases before the due date so the milage was pretty much a non-issue. And the disposition fee is always negotiable. I would get them to waive it up front. For me, it comes down to the fact that I don't have an issue with having a car note and I like having new cars evbery couple years. With that a lease is definitely a good option.

Mickey
 
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I never pay a lease deposition fee since I'm always rolling into another BMW lease.

The "money rate" is like the interest rate for the lease and it does vary from year to year just as loan interest rates do. Some years the spread between a loan interest rate and a lease money rate are significant (in which case a lease is often a much better deal than buying all other things being equal). Other years it's a toss up. I keep leasing because I can expense the lease payment as a current expense from my business and avoid having my CPA depreciate the car (which is huge as there is an absurdly low max depreciation on cars per year).
 

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Great post - very useful. I'm in the 20,000 mile/year club, so it may be a wash, but I'll definitely check out leasing. Especially if BMW has a $.20/mile rate - my wife paid $.25 on her Lexus.
 

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I used to lease my car. When you turn it in they give you all this BS about how your tires have a tread to shallow, how there's a scratch. It's such a hassle and anohter reason why we call them the "$tealer". I also drive 24k. mi a year. Talk about overages. Oohh! Bouight mine 5 months ago with 57k. mi on the clock for $34k. Good deal? Even my service guy said soo (P.S. I leased through NFCU. The dealer rates are another reason for the $tealer tittle.)
 

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Trading it in before the end of the lease is a way to get out of going thru the turn-in process. I have turned in 2 cars at the end of a lease (traded the rest in). First was a 96 lexus LS400. Car was flawless when I turned it in, so no question from the dealer. Second was just 2 months ago. Turned in the wife's CLS550. Tires were at the wear markers, 46K and never did a brake job and was praying the wear indicator lights weren't going to light up on the way to the dealership. Had a small dent in the top of the trunk (caused when I was tired and couldn't get the trunk to close and got mad----didn't realize the key was in the trunk so the trunk kept opening). Also a small dent on the lower part of the body just in front of the rear tire that I have absolutely no idea where it came from. Lease guy went out to check it in and I held my breath. Came in, gave me a copy of the paperwork and I was on my way. Not a word said. I think there are probably some dealers out there that nit-pick lease turn ins, but I think in general there is a broad range for what is considered "normal wear and tear." The paperwork I had actually said if it can be covered up by something the size of a credit card it was considered normal wear and tear. I think I would still prefer to trade. If they decide to hit everything it could turn out to be pretty costly.

Mickey
 
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Unfortunately in some states you have to pay the tax on the full sale price in a lease also

also the old good days of the lease are gone, most dealers will tell you now, that car companies really discourage them , simple reason is that they don't want to get stuck with large numbers of used cars if the economy takes another dip

only positive I see in a lease is that in the event of a crash, for example the situation with Autobahn in Texas , in that case you let them do what ever they want and then you turn it over at the end of lease
 

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Unfortunately in some states you have to pay the tax on the full sale price in a lease also

also the old good days of the lease are gone, most dealers will tell you now, that car companies really discourage them , simple reason is that they don't want to get stuck with large numbers of used cars if the economy takes another dip

only positive I see in a lease is that in the event of a crash, for example the situation with Autobahn in Texas , in that case you let them do what ever they want and then you turn it over at the end of lease
Those Autobahn bastards.
 
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