This is a silly problem to have – you go to rent Die Hard because it’s obviously a Christmas tradition to watch it with some pizza and beer and you are faced with the rent vs buy dilemma. You can rent the movie for $2.99 or you can buy it for $5.99 – which do you choose?
1. “Well, I suppose I’ll watch this at least one other time so if I watch it just one more time then the movie will have paid for itself!”
2. “It’s always better to own rather than rent. With renting I’m using it just once – it’s like throwing that $2.99 away. If I own it then I’ll have something to show for that $5.99 I spent. And it’ll be mine”
3. “It’ll be nice to have it that way when my friends come over we can all sit down and enjoy it. Who doesn’t like Die Hard, right?!”
An Investment Or A Liability?
Let’s stick with the movie for now, is owning it a liability or an investment?
It’s a liability because it’s a possession which I’ll have to assume ownership of without it being able to earn me a profit. I can’t rent it, resell it, license out the rights to it, nor claim any tax deductions for its purchase.
It’s helpful to follow the same thought process when it comes to buying a house, car, motorcycle, bicycle, or power tools.
By owning the movie I’m tasked with storing it, even if it’s just online in a cloud. I have to catalog it along with my many other possessions which is taken for granted.
Elective Or Necessary SPENDING?
Elective spending is an optional expenditure and therefore not a recurrent expense. I can choose to not have the elective expense and thus it’s an infrequent expense.
Necessary spending such as transportation, housing, communication, and groceries are recurrent expenses and it’s harder to opt out of these.
Owning my cable modem made sense because for the past 5 years I’ve been able to avoid the monthly rental for a modem. I decided to buy it used for $50 on Craigslist as opposed to renting it from my ISP.
Housing & Transportation
One might deduce that owning the car and the house would then make sense too. When you own it then you should be able to save money, right?
It’s rare to for a consumer to buy the kind of house that will save them money compared to paying rent. I have friends who were appalled by $3,000/month rent because they felt as though they were throwing their money away. So they chose to buy a home for $500,000.
Favorable arbitrage? I doubt it.
Housing and transportation are such rich industries in the US and so heavily subsidized that you got everyone and their momma with their hands in your pocket.
The Cost of Ownership
The is a cost to ownership is built into the price of most things but not all things. Remember inkjet printers? Their ink would cost more than the printer itself – the manufacturer anticipated this. They were banking on us not being willing to pay $299 upfront for a laser printer but willing to pay $79 for an inkjet.
Cars are the same way. It’s impossible for such a highly engineered hunk of metal and plastic to cost as little as it does.
The manufacturer knows that they’ll make their return on their investment because they are subsidized by various institutions to bring you this money drain of a product.
- registration fees
- violation/parking tickets
- windshield replacements
- oil changes
- depreciation of its value
- time spent shopping for another car
Home Maintenance Costs
You might buy a home for $300,000 but over the 30 years that you’ll own it there will be many recurrent annual expenses.
- 1% annual repair costs
- 10% remodel costs
- 1% annual property taxes
- 0.1% property insurance
- 1% property maintenance costs
Add up all the various expenses and you will have spent another $300,000 in the cost of ownership of that property in a span of 30 years.
We won’t include the time you’ll miss from your life to deal with repairs, renovations, maintenance, getting quotes, and shopping for a toilet plunger.
Owning Digital Media
You might think that owning a movie is the absolutely easiest thing in the world because it’s just gonna reside somewhere in the cloud – it’s not like you can download it, after all.
Let’s ignore the fact that you will never actually own the movie since you can’t sell it to friends (no resale value) nor let them borrow it for free.
When you own something you must maintain it. It might be something as seemingly benign as cataloging your possessions. But don’t underestimate this task because it’s an ATP consuming task.
There is a reason why so many people are adopting the minimalism movement. It’s exhausting owning so many possessions. From out kitchen equipment fetish to our landscaping.
That cloud where you store your movies on, will it always be free? That sure wasn’t the case with Google or Amazon who started out with unlimited free storage and soon throttled that down and now charges for it.
Nor can you download as many gigabytes of streaming media as you wish without your internet provider fining you for exceeding your bandwidth limit.
The Movie, Rent vs Buy
So what’s the verdict, rent it or buy it?
If they are offering you just 2x more the price of the rent to own the movie then you know beyond a shadow of a doubt that you are being played.
Movies change, tastes change, internet laws change, online companies go out of business, intellectual property owners can change their end-user licensing at any time, and there won’t be anything your lawyer can do about it.
When you rent then you place all the burden of responsibility, maintenance, risk, and depreciation on the owner. As for the movie, let Amazon or Google own the movie. Pay your $2.99 and snicker at what a bargain you’re getting.
Various Rent vs Buy Discussions
For the average Californian the idea of not owning your car may cause palpitations or explosive diarrhea. But consider that quite a few people in SF are now free of car ownership.
It makes sense to buy a home if it can pass the investment test or it’s something that you know you will stay in for the next few decades.
The investment test is what an investor uses to determine if a property purchase is a wise investment. There are various online calculators that you can play with to determine if a property is a good investment or not.
My condo would have made a good rental income property even if I decided to not stay in it and that’s why I had an easier time convincing myself to purchase it.
If you buy a house that you’ll stay in less than a decade then it makes it harder to offset the costs of property taxes, property insurance, renovation, maintenance, repairs, and moving expenses. It is often better to rent in such situations.
One of the biggest factors for this 10-year time frame is that moving is an expensive process.
In a city like Portland, and apparently SF and NY and pretty much any decent-sized European city, you can get by with a car. The luxury of hopping into your own car whenever you want is offset by the storage costs and parking headaches – not to mention the environmental stress of individual ownership versus car-sharing.
The rest of the time I get around on my bicycle and use public transportation. Distances up to about 3 miles I just walk since it’s much more enjoyable to do so.
Tools, Rent vs Buy
I know tools is a guy-thing and most men overdo their tool collection. But there is a fine balance when it comes to tool-ownership.
There are a decent number of tool rental businesses and even free tool sharing libraries.
Buying basic tools might make sense because they are either not available for rent or used so often that renting them would be too costly.
I’ve split the difference when it comes to the rent vs buy dilemma regarding tools:
- electric drill
- drill bit set
- allen wrenches
- tape measure
- staple gun
- soldering gun
- pipe wrench
In the past I had the kind of tool collection that Bob Villa would be jealous of. Now I rely on tool sharing libraries and friends to satisfy my tooling needs.
My Rock Climbing Shoe Rental Saga
Here is a little bonus material on rent vs buy. I had recently sent my bouldering shoes in for repair and decided to rent shoes each time I went to the gym for $3 per session until my shoes would be ready.
We hit the holidays and that slowed down the work at the shoe repair shop and my repair was delayed.
The shoes that were provided by my gym as a rental were maybe $50 brand new but not the best quality. And I already owned a second pair which also needed to be repaired.
I ended up renting for nearly 30 days, or $90. Would it have made sense to just buy a cheap pair?
I don’t think so. Buying another pair meant having another pair of shoes to store, repair, and catalog. This was an easy rent vs buy decision for me but I had some fun back and forths with my climbing buddies who questioned my decision.