To Lease or Buy
Disclaimer: I am not a tax professional; these are just my opinions, based on personal research. This should not be seen as tax advice!
The only lesson I remember from an Economics class I took at the University of California at Santa Barbara was my teacher going on and on about leases and saying why you should never lease a car.
That anti-lease idea stuck with me for years. I have yet to lease a car. I do, however, believe there are scenarios where leasing is beneficial and should strongly be considered.
The biggest problem I have seen when replacing aging computers, also referred to as life cycle management, is not having the cash around when needed.
The average cost for a business-grade computer is between $1,500-2,000. You can spend more or less, but that’s not the point here. Let’s go with $1,500 for these examples.
If you buy, the obvious benefit is that you don’t have ongoing, monthly payments and you own the hardware outright.
However, you lose the potential power of the entire cash amount invested. If you spend $20,000 on the computers, that is cash spent and gone.
If you buy and take out a fixed-term loan, your rate should fall between 3-5%. If you believe you can invest that $20,000 and net a higher return than 3-5%, that may be a better use of your money. If you invest that cash to expand your team and increase your overall revenues, you could net far higher than 3-5%.
The recurring problem I have seen with clients who buy their computers is that when 3 years rolls around and they should upgrade their computers- – they don’t.
There are many potential reasons for the decision.
The most common is a lack of cash. When the cash isn’t available, they figure things are running okay today so let’s keep them going and see how long it lasts
However, once over 3 years old, computers are no longer covered by AppleCare.
When a hardware problem arises, it’s not covered.
Failure rates go up significantly when a computer crosses the 3 years mark and exponentially when it crosses the 4th year. When a computer has a hardware failure, the tough decision has to be made, do spend money on this old computer to fix it or buy a new one? The cost of the repair is often more than the computer is worth.
This is reactive technology management at its worst.
The real issue here goes back to productivity.
Once a computer is 3 years old, its modern counterpart is significantly faster than the 3-year-old version.
If a new system could save 5 minutes a day, over 3 years, that is 50 hours of added productivity (using 5 minutes a day, 200 days a year). If you bill $250 an hour – that is $12,500 (50 hours x $250 per hour) during those three years.
You could be charging your clients for those additional hours instead of fumbling through with an old computer.
In my mind it’s a no brainer, the savings pay for the computers.
However, when faced with having to spend $10 or $20k, most people’s mindsets are short-sighted, “What is it going to cost me today?” They only see that $10 or $20K cost and delay upgrading hardware. They fail to see the value of having great tools to do great work.
The easy solution is to set a budget and put money aside every month towards purchasing new hardware.
If you know you need to spend about $20k every 3 years, set aside $555 every month, and when the time comes, the cash is ready and in reserve.
Great idea – however, the truth is that few people ever do this (at least from direct experience).
After the 3 years, when new hardware is purchased, securely erase all your computers with a 7-pass, government-level secure-erase. Reinstall a clean operating system and then sell the Macs.
Most of the time, when there isn’t a set process for securely erasing computers, most firms will just keep old computers sitting around gathering dust. (seen it many times)
Technology sitting on the shelf does not gain value as it ages. Options to get rid of old hardware range from offering them to employees, selling them on a local buy/sell site, or selling them back to a site like https://www.sellyourmac.com/.
Let’s look at the leasing option.
There are several benefits to leasing Macs as opposed to buying them:
- Write off 100% of the lease payments.
- No tax on the purchase
- The total spend is financed, requiring a monthly payment
- At the end of the term, start a new lease, get new hardware, and ship the old hardware back to Apple (after securely wiping the computers)
- Benefit from upfront discounts through Apple further lowering the cost.
The biggest benefit is the cost is built into your monthly expenses (a forced budget) and the life cycle management process is easy to repeat every 3 years. You and your staff are always working on current model Macs – fully leveraging the benefits of new technology.
The first time we leased, in December of 2016, we needed to upgrade 9 computers at GlobalMac IT.
I closely looked at both options, buy, or lease.
I first I was certain I would choose to purchase and taking out a term loan, with an interest rate of 4.5%. For nine computers, with discounts, and taxes, the total would have been $20,766. After adding in the 4.5% interest over 36 months, the total paid would have been $22,238.09. The monthly payments would have been $612.
Once the 36-month term was up, I would need to list the computers after having the OS reinstalled after a secure erase of all data.
The cost of that step is often not considered.
Either someone on your team or your IT consultant needs to go through the process of getting the computers ready to sell, list them, and negotiate with buyers, price haggling, etc.
How much time will this take?
A conservative estimate is one hour per computer, bare minimum. Wiping down the computer, reinstalling the OS, getting the specs to list the computer, photographing it, and listing the computer.
All these things add up and cost money. 9 computers, 9 hours. Paying your IT person to do this could be $1,350 (9 hours @ $150/hr) or $405 using your internal staff @45/hr – assuming they know how to do all this the right way.
On the flip side, let’s look at the leasing costs.
For the same hardware, it will cost $500 a month, which works out to $18,000 in total spent over 36 months.
That is $4,238 less than purchasing.
I do NOT own the hardware, so when the lease is up, I turn it back over to Apple and repeat the process.
That is valuable since someone on my team is not spending time prepping, listing, and selling the computers.
Through leasing, we saved $4,238. You can challenge that I don’t own the computers and that has value. A 3-year-old Mac could very likely be sold for $500-1,000 depending on the condition, specs, and how skilled someone is at listing and selling for max dollars. But all that takes time.
In my mind, leasing is far superior and this is the option we go for each time the 3 years come up.
It does not waste anyone’s time on my team. We get solid discounts with Apple, I can invest my cash into my people and grow our team, and I ensure we are all using and benefitting from the modern technology available to us. In the end, our clients also win – we can provide faster support since my team is working on the fastest computers available.
Last tip: don’t be cheap.
On my last round of leasing, I briefly considered getting MacBook Airs instead of MacBook Pros for the admin staff on my team (vs tech team who can justify the beefier Macs).
I did the math and the savings were about $200 per computer. Broken up over 36 months, which works out to an additional $5.56 per computer.
The ROI on that is a no brainer. Look at your annual cost of labor vs. computer costs. The former eclipse the latter. Do all you can to give your team the best tools to do great work.