[Lassaxi]

So I understand that that the fundamental difference between an MSD and a cap cost reduction on a lease is that the add'l security deposits will come back to you at the end of the lease, whereas the cap cost reduction is gone forever. Two questios:

1) I know the MSD is essentially used to buy down the money factor. How, if at all, do MSDs and cap cost reduction affect the residual? In other words, if MSDs buy down the money factor, does the cap cost reduction essentially buy down the residual, so that if one were to buy out the car at the end of the lease, the buyout price would be lower? (I know that MSDs also sort of have this effect because you can simply take your MSDs back at the end of the lease and use them toward the purchase of the car- my concern is that the cash is tied up in the car rather than earning interest someplace else.)

2) I read someplace that the maxmium allowable MF buydown with MSDs only ends up being about .00049. But doing this ties up a considerable amount of cash in the car that could otherwise be earning interest at a higher rate in a savings account or the like. Not being terribly financially savvy, I am just not sure if the return on investment is better making the MSDs and lowering the MF, or leaving the MF alone and investing the cash that would otherwise go into an MSD. Has anyone ever run the numbers?

[DrGP]

Having just tonight gone over this with my SA, this is what I understand. The MSD, lowers the money factor. Plus you get 4% interst rate on your MSDs. I do not believe that either MSD or Cap reduction actually lowers the residual. BUT they do lower the payments. Cap reduction is just a pre payment of the lease payments and is used to reduce the monthly payment. The MSD do save you money because it lowers the money factor (and thus the lease payment)and generates interest that is returned to you at the end of the lease like a savings account. Anyone please correct me if I am mistaken.

[STE92VE]

Cap reduction is not a pre payment of the lease. It reduces the monthly payment because the value of the lease is reduced. Also, if the car gets totaled as soon as it leaves the dealer (heaven forbid), GAP coverage only covers the remaining lease payments and the $$$ you put towards reducing the cap cost are history.

Sounds very confusing...why don't you just buy it and finance? BMW's hold their value very well and you have options if you decide to part with it before the term of the loan. Car companies love leasing because you the customer pay for the whole depreciated value and when they get the car back, it's all gravy to them.

[808e46m3]

As posted elsewhere on this board, a lease is basically a gamble between you and BMW FS (or whomever you lease from) that the actual fair value of the car when the lease period is up will be favorable vs. the residual value used in the lease. If the actual FV is higher than the lease residual, you lose. If the actual FV is lower than the residual, you win.

Cap cost has nothing to do with the residual. You are merely reducing the lease by paying down in advance from the negotiated sale price. It gets subtracted before anything else is considered. You will lose your cap cost $$ if you total the car - gap insurance only covers the difference between your insurance payoff amount and the remaining lease payments you owe.

MSDs can sometimes reduce your MF, depending on the lease agreement. Not sure what BMW FS's policy is regarding how much you can drop your MF. Also not sure on the part about the 4% interest. Neither is mentioned on the BMW FS website.

[Lassaxi]

Originally Posted by BimmerEnvy

Cap reduction is not a pre payment of the lease. It reduces the monthly payment because the value of the lease is reduced. Also, if the car gets totaled as soon as it leaves the dealer (heaven forbid), GAP coverage only covers the remaining lease payments and the $$$ you put towards reducing the cap cost are history.

Sounds very confusing...why don't you just buy it and finance? BMW's hold their value very well and you have options if you decide to part with it before the term of the loan. Car companies love leasing because you the customer pay for the whole depreciated value and when they get the car back, it's all gravy to them.

They're not going to get the car back. I intend to lease-to-buy. I've gone over this in other threads before, but the lease MFs are so low that I can essentially use the lease to finance the car over three years, rather than pay a higher interest rate to finance over 5 years. Additionally, I'm going to take the money I would have used toward a downpayment (which would have been about 1/4 the full purchase price) and lock it up in a 3-year CD at roughly 5%. Doing the same over the next two years (i.e., saving 1/4 more of the original purchase price per year in a high-yield savings account or shorter-term CD) will put me significantly ahead of where I would be if I had financed.

The only issue is how I can maximize my leverage on the deal. With a cap. cost reduction, I believe my residual will be lower (not as a percentage, but as a $ amount, because the lease is less to begin with). However, using MSDs, I think I can buy down the MF a bit, which, if the other posters here are correct, sounds like the better option becuase I'll get interest on the MSDs, and can use them to buy out the car at the end of the lease- that sounds like maximum leverage to me, but someone should correct me if I'm wrong.

[Lassaxi]

Originally Posted by 808e46m3

As posted elsewhere on this board, a lease is basically a gamble between you and BMW FS (or whomever you lease from) that the actual fair value of the car when the lease period is up will be favorable vs. the residual value used in the lease. If the actual FV is higher than the lease residual, you lose. If the actual FV is lower than the residual, you win.

Cap cost has nothing to do with the residual. You are merely reducing the lease by paying down in advance from the negotiated sale price. It gets subtracted before anything else is considered. You will lose your cap cost $$ if you total the car - gap insurance only covers the difference between your insurance payoff amount and the remaining lease payments you owe.

MSDs can sometimes reduce your MF, depending on the lease agreement. Not sure what BMW FS's policy is regarding how much you can drop your MF. Also not sure on the part about the 4% interest. Neither is mentioned on the BMW FS website.

Thanks for your response. I think the 4% interest may vary from state to state- I know some states have laws that security deposits must be kept in an interest-bearing account, and some even specify the minimum return that must be provided (or at least a forumula that's pegged to the prime rate).

[STE92VE]

Originally Posted by Lassaxi

They're not going to get the car back. I intend to lease-to-buy. I've gone over this in other threads before, but the lease MFs are so low that I can essentially use the lease to finance the car over three years, rather than pay a higher interest rate to finance over 5 years. Additionally, I'm going to take the money I would have used toward a downpayment (which would have been about 1/4 the full purchase price) and lock it up in a 3-year CD at roughly 5%. Doing the same over the next two years (i.e., saving 1/4 more of the original purchase price per year in a high-yield savings account or shorter-term CD) will put me significantly ahead of where I would be if I had financed.

I don't think you will come out ahead planning on a lease-buy...taking into account upfront bank fees and if you don't pay for the car at the end of the lease with cash, you will pay a higher interest rate for a used car. After taxes, that 5% CD is a pretty poor investment. Possibly a tax-free bond fund would get you a better yield. The only benefit in a lease-buy deal is that you have the flexability at the end of the lease to walk away from the car.

I did that with my son's RSX because I was going to pay cash. Leasing it for 3 years would only cost me $1600 over a purchase and since it is his first car with a MT, it gives the flexability of walking away at the end of the lease. If you definitly will buy the car, then it makes sense to purchase from day 1.

[Lassaxi]

Originally Posted by BimmerEnvy

I don't think you will come out ahead planning on a lease-buy...taking into account upfront bank fees and if you don't pay for the car at the end of the lease with cash, you will pay a higher interest rate for a used car. After taxes, that 5% CD is a pretty poor investment. Possibly a tax-free bond fund would get you a better yield. The only benefit in a lease-buy deal is that you have the flexability at the end of the lease to walk away from the car.

I did that with my son's RSX because I was going to pay cash. Leasing it for 3 years would only cost me $1600 over a purchase and since it is his first car with a MT, it gives the flexability of walking away at the end of the lease. If you definitly will buy the car, then it makes sense to purchase from day 1.

I will be paying cash at the end of the lease. Believe me, even after the fees and taxes are accounted for, I will definitely be coming out ahead on the lease-to-buy scenario by just under $2,000 (which doesn't even include the time-value of the money I save by pushing the biggest chunk of sales taxes off 3 years into the future). The MF that I've been quoted on a 3-year, 10,000 mi lease is so low (as compared to the best finance interest rate I can find) that I would still break even with an investment return of slightly under 4%. And that doesn't even take into account any interest I may earn on the MSDs.

The lease is technically more expensive in the sense that I will be paying more total dollars than I would by financing. But by investing the money I would have used for a downpayment, and continuing to save each year so as to have enough to pay cash at buyout time, I earn enough interest that I have more money after 3 years by leasing-to-buy than I would by financing over 5 years. That makes the dealer and finance company happy, since they get to make a little more money on the sale, and it makes me happy since I pay less out of pocket. An added bonus is that if I get into an accident or have persistent mechanical or electrical problems, I can turn the car in at the end of the lease period and come out even farther ahead.

[STE92VE]

Sounds like you really did your homework. Hope it works out well for you. Good luck.

[Lassaxi]

Originally Posted by BimmerEnvy

Sounds like you really did your homework. Hope it works out well for you. Good luck.

Thanks, and thanks for your help.

[sk330i]

I don't think lease-to-buy is a wise decision. The residual value of your lease is based on the US MSRP. If you lease the car for 3 years then buy it at the end, you are pretty much paying FULL MSRP for the car in addition to whatever fees you paid upfront at signing. Is that really something that you want to do? You can easily negotiate a deal which is $1500/$2000 or even more off MSRP.

As I learned on bimmerfest, there are 3 major components in a lease: Depreciation, Rent & Tax.

Depreciation = Adjusted Cap. Cost - [MSRP*Residual(%)]
Rent = Adjusted Cap. Cost + [MSRP*Residual(%)] * MF
Monthly Payment = Depreciation + Rent + Tax

By looking at the formulas, it's obvious that if you use MSDs, you effectively lower the MF, or the "Rent" portion. At the end of a lease you get all of the MSDs back, given if the car doesn't have excessive wear & tear. In my opinion, this is 1000x better than putting any downpayment.

For my particular case (ED 07 335i sedan, 2-yr lease), it would save me $820 over a 2-yr period if I use 7MSDs ($3150) vs none. I think this is much much better than any savings account out there...

[Lassaxi]

Originally Posted by sk330i

I don't think lease-to-buy is a wise decision. The residual value of your lease is based on the US MSRP. If you lease the car for 3 years then buy it at the end, you are pretty much paying FULL MSRP for the car in addition to whatever fees you paid upfront at signing. Is that really something that you want to do? You can easily negotiate a deal which is $1500/$2000 or even more off MSRP.

As I learned on bimmerfest, there are 3 major components in a lease: Depreciation, Rent & Tax.

Depreciation = Adjusted Cap. Cost - [MSRP*Residual(%)]
Rent = Adjusted Cap. Cost + [MSRP*Residual(%)] * MF
Monthly Payment = Depreciation + Rent + Tax

By looking at the formulas, it's obvious that if you use MSDs, you effectively lower the MF, or the "Rent" portion. At the end of a lease you get all of the MSDs back, given if the car doesn't have excessive wear & tear. In my opinion, this is 1000x better than putting any downpayment.

For my particular case (ED 07 335i sedan, 2-yr lease), it would save me $820 over a 2-yr period if I use 7MSDs ($3150) vs none. I think this is much much better than any savings account out there...

Thanks for you response about the MSDs.

Even with the residual calcualted at the full MSRP, I still come out ahead. I ran my calculation based on the actual quotes I got from dealers, not based on the BMWUSA.com estimator. Don't forget that the payments are still based on the negotiated price, not full MSRP, so your negotiation is not lost all together. As I explained above, I will pay more, but I will have more cash in my pocket at the end of the day because the investment interest (even at less than 5%) more than makes up for the increased cost of the lease.

I should also have mentioned that I'm doing ED, so there's the added lease benefit that BMW will pick up one of the payments.

[sk330i]

Originally Posted by Lassaxi

Thanks for you response about the MSDs.

Even with the residual calcualted at the full MSRP, I still come out ahead. I ran my calculation based on the actual quotes I got from dealers, not based on the BMWUSA.com estimator. Don't forget that the payments are still based on the negotiated price, not full MSRP, so your negotiation is not lost all together. As I explained above, I will pay more, but I will have more cash in my pocket at the end of the day because the investment interest (even at less than 5%) more than makes up for the increased cost of the lease.

I should also have mentioned that I'm doing ED, so there's the added lease benefit that BMW will pick up one of the payments.

Don't forget about the 0.0003 ED adder if you decided to do ED.

[Lassaxi]

Originally Posted by sk330i

Don't forget about the 0.0003 ED adder if you decided to do ED.

Got it- thanks.