Big Question for Big-Ticket Item: Which Is Better, to Rent or to Buy?
When it comes to big discretionary items, such as vacation homes, recreational vehicles and watercraft, financial planners often counsel that it’s much better to rent than to buy. That’s because you incur costs only when you use it, and you’re likely to use these things so infrequently that buying simply “doesn’t pencil out.”
Phil and Kristi Berlioz of Valencia beg to differ. They bought a half-interest in a speedboat 11 years ago for water-skiing. Given how often they and their boat’s co-owner take it out, their net cost per use is about $10 to $30 a day. If they tried to rent a water-skiing boat, which is inconvenient and difficult, it would easily cost them 10 to 20 times as much.
The Berliozes’ example illustrates that the economics of buying big-ticket items such as these are determined as much by disposition as by dollars.
“There’s no right or wrong answer to this one,” said Edward O’Hara, a fee-only financial planner with Capital Asset Management Services in Silver Spring, Md.
If you use the item frequently and over a long period, it’s better to buy, regardless of whether your dream is a motor home, boat or vacation house. But too often, people think they’re going to wear out the boat or jet skis they’ve bought, only to watch them age in the driveway.
For others, use isn’t the problem--it’s lust. The moment they buy the “Mini Winnie”--the 22-foot Winnebago motor home--for example, they begin to pine for the larger or updated model. Sooner or later, they sell at a steep loss and try again.
“We see people who buy vacation homes,” said Ann Egan, a planner with Vision Capital Advisors in Fountain Valley. “They go for the first few years, but then lose interest, decide that it’s too far away or things change.
“We have a place in the mountains like that,” she admitted. “We have four families who own a place up in Wrightwood. We used to go all the time when the kids were little. None of us go anymore.”
Phil Berlioz notes that several of his acquaintances have also purchased boats and jet skis, but with less success.
“They just bought the 2000, and they’re already talking about what’s on the 2001 model,” he said. “For someone like that, renting is a better deal because they can constantly satisfy their need to be the ultimate consumer.”
Indeed, the real trick to buying wisely is accurately projecting just how much you’ll use the item and then taking a hard look at what it would cost to buy versus rent over its anticipated life span.
“You’ve got to carry the clock forward and figure out which way you’re likely to have the most money left,” said Philip J. Holthouse, partner at Holthouse Carlin & Van Trigt in West Los Angeles.
Take the Berliozes’ boat, for example. Phil Berlioz and a grammar school buddy bought the boat from someone who had owned it less than a year. It cost just $9,000--about $3,000 to $4,000 cheaper than had they purchased it new. The boat has depreciated since--Berlioz estimates it’s worth about $5,500 today--but only by about $300 annually. (Of course, the biggest hit was taken by the boat’s original owner, who provides fodder for the “don’t buy” crowd, because he used it only a few times.)
The Berliozes and the co-owner each take out the boat at least 10 days a year, and often considerably more regularly. Given that their expenses amount to about $250 annually for insurance and registration, their net cost per use is roughly between $10 and $30, depending on how often they use they boat.
If they wanted to rent a similar boat, they’d pay much more. Rental prices vary from lake to lake, but roughly equivalent boats cost between $155 (Holmes Beach, Fla.) and $395 (San Diego) for daily rental. The median price of the numerous rental locations checked via the Internet is $250.
Another Los Angeles couple checked out the price of buying versus renting a motor home and found that the cost to buy a small Winnebago with a generator was $50,000, while renting one cost less than $1,000 a week even during the peak summer months. (The rental cost is often cut in half during the winter.) Given the expectation that they’d use the motor home three weeks per year, they figured it would take more than a decade of trips to make that camper pay off, so renting was the better deal.
The math gets a bit more complicated when considering vacation homes because housing has the potential to appreciate. Motor homes and watercraft, on the other hand, almost always will decline in value. If a vacation home does rise in value, even modest use can pay off in the end. Still, some planners argue that your money could be better invested elsewhere.
Of course, many people have been smart or lucky enough to buy vacation property in areas that have enjoyed rapid appreciation, but planners note that because popular getaway spots often are in remote and easily developed areas, those markets can be fickle.
“I have heard people rationalize that they are investing their money [in a vacation home], but they are investing at virtually zero rate of return,” said Preston Caves of Manhattan Beach financial planning firm Caves & Associates. “We did a very detailed analysis for clients who wanted to buy a $300,000 home in Santa Barbara and found that they would be much better off if they rented the nicest suite in town for the five or six times a year that they were going to go up there rather than buy.”
But sometimes even the best mathematical arguments are no match for the psychological draw of ownership, Caves acknowledged. Those clients bought the vacation home and fired the planner.
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Times staff writer Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com.
