I’ve been reading a lot about the “1%” rule and the pros and cons of using that figure to determine if a lease is a good deal or not. For those why may not know, it says monthly payments should be about 1% of starting MSRP, so $600 for a $60,000 car would be a ballpark good deal. I also don’t know if taxes should or shouldn’t not be accounted for here. I do see the flaw in that calculation, as it does not account for lease term variances (36,42, etc.). What I am trying to understand is how to determine what a good deal is. Regardless of money factor or residual, I just want to know if the amount I am paying each month is appropriate based on the MSRP and taxes in my area. If I am going to hold to lease-end, and I put zero down, I don’t know why all the other factors matter? Please help me understand if my logic is incorrect.
All the other factors matter because it’s the only way to ensure that you’re getting the best deal possible on the car. Sure, a deal could be seen as fair given the monthly and MSRP, but without all of the information, you could be overpaying without even knowing it.
Precisely, there was a time when you could get i3’s for ~$100/month. If you stuck with the 1% rule, you’d have been happy paying $450, which would have obviously not been a good deal.
The 1% is a rule of thumb to simplify if a car leases well, however, you should always aim for the best deal possible on the car. That may be 0.5% or 1.5% depending on the car that you choose.
A lot of folks will shop the deal and dismiss anything over 1%, and they’ll all be driving Q50’s and base loaner 3 series. Pick what you want, make sure you can afford it, then get the best deal possible (which may be a lease or a purchase).
In real estate, there’s a basic formula to determine if it makes more sense to rent or purchase in a certain market.
I think the 1% rule serves a similar purpose- around 1% or under, it’s a no brainer to lease.
I don’t think that’s true in either situation. In real estate, rent vs. buy would depend on the cap rate in your analysis which is highly subjective and is going to depend on the specific property you’re looking at.
In cars, if your expected residual value is higher than the lease buyout rate and the interest rate is lower on a purchase, even if you could get 1%, the purchase is the better financial decision. These circumstances are rare, but they do happen.
For example, if I had financed my RX350 that I held for 3 months instead of leased, I would have not had to pay the acquisition fee and would have net more profit when I got rid of it.
But you would have paid taxes on full sales price on it. Which would have been couple thousand more than acquisition fee
Fair enough, in my specific case, but what if I was in Oregon 
The best way and quickest path to a great deal is via EDUCATION. Being a mathematician, I have little use for rules of thumb. I flew airplanes and aviation rules of thumbs can get you killed. So, here’s my take on all of this for whatever it’s worth…
Common costs or direct costs are those costs that everyone pays (e.g., acquisition fee, DMV fees, taxes, etc) and for which you have no control. Yes, some of these costs do vary depending upon locale and local custom. For example, taxes vary widely depending upon where one resides and should not be considered in this “so called” 1% rule. If the difference between a horrible deal and fabulous deal is taxes, then I have a real problem with that ideological construct. Why should someone be told that their deal is horrible if they reside in Illinois in an area where their sales tax rate is 11% compared with someone who lives in Montana with a 0% sales tax rate? Be careful of marked-up acquisition fees. Some dealers will mark-up the fund provider’s acq fee by as much as $300. Dealer doc fees can be outrageously high especially in Florida. Be careful… you may need to go elsewhere to avoid ridiculously high doc fees. Again, what matters are the variables that you can control.
Money factors matter because it reflects the cost of money for which you do have some control especially if your credit is excellent. You want to be sure that you’re getting the lowest MF possible given your credit history. The lowest money factor is known as the base rate aka buy rate which has 0 mark-up and is reserved for those with outstanding credit (usually 720+). Do your homework and check edmunds. Money factors sometimes depend upon the term selected. As such, term matters. Another factor that matters is the residual factor which is set by the fund provider, not the dealer. It is dependent upon usage (miles driven annually) as well as the term of the lease. The question is what is the optimal term or the sweet spot that results in the lowest possible cost to you? The answer is that it depends. The longer the term, the lower the payment. But, are the differences significant? What payment are you most comfortable? You could collect all the pertinent data for terms of say 24, 30, 36, and 39 months, crunch the numbers, and compare payments. However, 36 months is often where you’ll see the best deals partly because most warranties run for 36 months. But, in all fairness, I’ve seen the best deals at both ends of the spectrum. Sometimes, 24 months is the sweetheart deal; other times, 39 months is the best deal… it all depends. Last but not least is selling price matters. Do your homework. Check all available rebates and incentives by going to the fund provider’s website as well as edmunds and leasehackr. Lots of extremely knowledgeable folks on this website. Get that selling price down! Look at what others are paying and then formulate your own discount predicated on market demand and supply in addition to those being offered.
When considering the 1% rule cost of money is already factored into the payment.
People here aren’t sitting around and playing to outsmart the finance companies. Residual values are typically inflated to make the lease payments attractive, so there will usually be negative equity throughout the duration and at the close of the lease. The cars that lease well will almost always be negative at the end of the lease. Hondas typically doesn’t lease well because their residuals are conservative and realistic; thus there’s never any discussion of leasing a Honda here. People buy Honda’s.
If a 45k Mercedes c300 can be leased for $450/mo with minimal drive offs, the sentiment is that it leases well and it’s thus a great candidate for leasing. If a $65k c63 leased for the same drive offs but $1250/month, that’s almost 2% of msrp, leases horribly, and everyone says should just be purchased. This is an extreme example but it illustrates my point.
Again, the 1% rule is just a very casual and general litmus test for if a car leases well or not. Cars that lease horribly should just be purchased.
This is a bad example because you don’t keep the car for the duration of the lease and satisfy the contracted terms.
If you knew in advance that you’re only keeping the car for 3 months then at that point you are just looking for the cheapest way in and out of a car for a short period. An expensive acquisition fee can be amortized over a long lease term. If only keeping the car for 3 months, it makes leasing almost unviable, and thus the 1% rule doesn’t apply and shouldn’t be considered.
Asked and answered before.