These days you can get leasing agreements for almost everything. From essentials like cars and appliances, to personal things like computers and gym equipment, to valuable bits of property like homes or commercial buildings, leasing is becoming an acceptable standard.
Lease payments are based largely on the depreciation a property will go through because of use by the renter. There is also an interest earned that will benefit the company providing an option for lease on a particular property.
Many people get into lease agreements because of what initially appears to be favorable rates, but as time goes on, they come to realize that they are paying much more than their initial assessment.
Make sure you understand the lease agreement before signing. You could potentially be paying much more than what you bargained for and not getting a good return on your investment.
You can easily break down your annual lease payments if you follow the steps below:
- Determine value. This first step determines the market value of the land you potentially want to lease. This is done so that you have an accurate gauge on what to base your lease payments on.
- Learn the interest rate. Next, determine the potential interest rate you will be paying on the leased property. Normally the leaser or the financier will determine the rate.
- Plug in the "money factor" After determining the interest rate, divide it by 2400. That number is the "money factor" utilized by most leasing professionals
- Decide the time. Next, figure out how long you will want to lease the property. A year? Five years? Longer? Most lease terms are usually within the 3 to 5 year timeframe.
- Estimate the Residual Percent Value. The Residual Percent Value is how much the land will be valued after your term is up. Most leasers place the value at around 60% of the original rate before you leased it. The percent differs with length of term; the lengthier the lease, the lower the residual value becomes. The higher the residual value is, the lesser the lease payments become.
- Get the Residual Value. Next you have to determine the Residual Value. You can get this by multiplying the property value against the residual percent.
- Determine Monthly Payments. Next, divide the property value by the number of payments monthly you'll make in the terms of your lease contract. For example, if you have a 3 year lease, you'll be making 36 monthly payments. Divide that number against the value of the property to get how much you'll be paying a month for the next three years.
- Factor in interest. After getting your monthly payments, add in the interest. You get the interest of the property by adding Residual Value (step 6) to the Property value (step 1) then multiply this with the money factor (step 3)
- Compute for your total monthly payments. Throw in the payment to encompass the depreciation of the property to your Monthly Payments (step 7) along with the cost of monthly interest. The sum of this will be your overall Monthly Lease Payment.
- Multiply by 12. After you get your overall Monthly Lease Payment (step 9) simply multiply this with 12 months to get the Annual or Yearly Lease Payment.
Following these simple steps should allow you to calculate how much you are going to spend yearly if you lease property. Many businesses are kept in the red because they miscalculate how much they'll be spending on lease annually. With these simple steps in mind, you should be able to determine the best kind of lease to get for yourself.