If your relationship with your clients is as deep and strong as it should be, it’s likely they will call you before making a large purchase—think second home, boat—to ask if they can afford it, and how to pay for it.
That’s a good time to tell them that they should be asking one additional question: Why not rent? Despite the finger wagging from some moralizing financial pundits, clients can get the same enjoyment from their budget-busting extravagances with less hassle and expense by renting, instead of buying.
Here are the potential drawbacks of ownership, along with some common high-cost expenditures made by clients and how renting can cut the associated financial, psychological and logistical toll.
Why not buy?
Using a big chunk of cash to make a discretionary purchase might tie up funds that a client may need for ongoing spending or emergencies in the future.
That reduced liquidity can get really expensive if the client has to cover future expenses by instead withdrawing money from tax-sheltered IRAs or selling appreciated assets (and paying capital gains taxes).
With ownership, of course, comes control over the purchased item. But it also confers the responsibility of other costs on top of the purchase price, including insurance, maintenance and repairs.
If you’re discussing the purchase with a couple, there is a good chance that one partner is more excited about the purchase than the other. The much smaller cost commitment of renting may make the idea more palatable to the less enthusiastic partner.
Last but certainly not least is the cost of depreciation. Pleasure purchases can often drop 20% per year, and maybe more if the item needs to be sold during an economic downturn. On a $50,000 purchase, that could mean a $10,000 loss in the first year alone.
If clients still mistakenly believe that buying is better than renting, have them compare the annual prospective cost of ownership (divided by the number of hours/days/weeks they expect to actually use the item) to see if renting will be less expensive.
You can reach a compromise with clients who are reluctant to rent by suggesting they try your suggestion for the first year or so, and then if they are still itching to buy after that, they can do so with greater confidence and experience.
A second (or third) home
The romanticism of owning a place at the lake, in the woods or on the beach is understandable. But those optimistic notions are soon tempered by renovation and upkeep aggravations, the inability to attract friends and family to visit often enough, and the feeling that the owners are “anchored” to that specific location, when they could (and should) be seeing the world instead.
Then there is the purchase cost. Let’s say the clients are buying a $300,000 place, putting 20% down and are fortunate enough to get a 30-year mortgage at 4%.
The monthly mortgage payments alone would run over $1,100 ($13,200), and the interest cost of the mortgage would be $9,600 in the first year.
Paying cash of course eliminates the interest cost of the mortgage. But it also adds illiquid real estate to the clients’ overall investments, in addition to their primary home.
With the abundance of current owners renting out their places by the day, week or month, there has never been a better time for clients to stay in a home-like residence just about anywhere they could want.
“BOAT” stands for “Bust Out Another Thousand”
The cost of buying a boat is no different than that of a car or truck (usually from a few hundred dollars up to $50,000 or more, but six or seven figures is not unheard of). But unlike a road vehicle, the expenses of a boat really begin to pile up after the purchase.
Start with getting the boat to and from the water. Your clients need a trailer, and of course a vehicle big and reliable enough to haul tons of watercraft (plus hold the several friends or family members they’ll be bringing along).
They can instead store the boat at the cabin or a marina, but then they’re limited to boating on that particular body of water.
The more the clients use the boat, the more they’ll spend on getting it ready for use and cleaning it up afterwards. Adding up fuel, insurance, repairs and storage, and you understand why the website Boats.com says the annual cost of boat ownership is usually around 15% to 25% of the boat’s value (for a $40,000 boat, that’s $6,000 to $15,000 per year.)
The cost of renting a boat depends on the geographic area and the type. But most weekenders and vacationers can find a suitable craft for a few hundred dollars per hour, plus fuel. They would have to rent it for 30 days or more in a year before the cost of renting would exceed the cost of ownership.
And even then, renting a boat absolves the client of most of the costs and aggravation of owning one.
Motor homes have all the cost, depreciation, maintenance and storage issues of boat ownership, and aren’t nearly as much fun to drive.
Prices for new RVs are more than your clients probably paid for their first house, and the value drops at least 15% to 20% per year.
Yes, the clients can take advantage of that rapid depreciation by buying a used motor home, but the cheaper they go, the more likely it is that the land yacht breaks down miles away from civilization, much less near any qualified motor home mechanic.
Seeing the open road from a moving condo is attractive, but the clients are less likely to spend their nights parked near a roaring waterfall in the wilderness, and instead “camp” out in the nearest Walmart parking lot.
This is definitely one item that nomadic neophytes should try for a few weeks before they buy.
Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster).