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Tuesday, June 18, 2013

Owner vs renter mentality and why you should align your long term benefit and the transaction model.

Owners just have a different mentality compared to renters. The mentality shows up in so many little ways. The pride of ownership really can't be mistaken. Fundamentally the difference can be simplified as this: owner gives and renters takes. Owners invest time, money, and other resources into the asset to maximize the value of asset or the extend useful life of the asset based on some reasonable expected return on effort. Renter minimizes the effort and avoids investing time, money, and other resources in preparation for the exit based on the expected rental time span.

The most obvious example is car owner vs leaser. Most owners would not miss the recommended oil change or other scheduled maintenance. On the other hand, some car brands has to give away oil change for free during the lease period to incentive leaser to bring in the car. Leaser would do it in the beginning because the expected rental exit time far exceed the effort time. But as the exit period approaches, the value or the benefit of the scheduled maintenance decreases dramatically because long term benefit will go to someone else after the rental period.

I'm not suggesting that everyone should only buy a home, a car and completely avoid leasing or rental. These are financial transaction model decision that can be decided by considering multiple factors and can be quite advantageous. However there is a strong correlation between the transaction model and the user's mentality, and that is the source of the danger.

 I believe in order for a person to be successful in anything, one must *own* the problem and the solution. Ownership is a mental attitude completely within ones control. You can mentality own any problem and solution that you put your mind to. When you own the problem, you will invest time, and money into the problem and solution. If you have a renter attitude of the problem, then you hope it will go away on its own or you want call someone else to fix the problem as cheaply as possible. 

The initial purchase transaction model will likely to set the mental attitude and behavior for the useful lifespan of the asset. It's quite difficult to apply a different attitude after the transaction model as been set. Here are my personal finance spending short hand.

1) Avoid buying or leasing if possible. Less is More.
2) Buy to own appreciating asset and build up equity over time.
     House, stock, businesses, etc.
3) Buy big ticket items to keep so you will be motivated to maintain the value and extend the useful life
     Car, TVs, major appliances.
4) Rent lifestyle or rapidly depreciating items.
     Gym membership, gym equipment, boats, RVs, skis
5) Pay per use
     Carpet cleaners, DVDs, books, vacation house, time-shares,

Back to the car example, I wouldn't lease a car because the I believe I could maintain the car better and could do a better job selling my car for a good price then the dealership. I can keep the margins on the transaction for myself in case I decide to sell. I wouldn't buy a used car even though the saving is considerable because I don't trust the maintenance level of the average car owner. I still own my first car and it's almost 19 years old. The car is still in good condition (relatively for a 19 years old car) because I had an owner's mentality and invested the proper time and energy for the maintenance. I budgeted 10 years as the useful lifespan for the car (http://www.rickychang.com/2008/01/when-am-i-going-to-buy-new-car.html) and I'm nearly 100% over my target. It's a great feeling. Instead of car payments, I invest that money into other opportunities such as sport camps and college funds for the kids.

The decision to rent or own is not a simple decision that can be made by the online calculators. Those calculators are useful starting points. The real decision is your personal mental attitude and setting proper goals and expectations that are in alignment with the attitude.
If you know your enemies and know yourself, you will not be imperiled in a hundred battles... if you do not know your enemies nor yourself, you will be imperiled in every single battle.
Sun Tzu The Art of War


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