[Multimodal]

I am considering the lease or purchase of a 2021 M3. BMW provides a number of interesting incentives and financing programs (leasing, low-rate financing, BMW Select, Owners' Choice) that aren't always straightforward in their puts and takes. I wanted to outline my personal analysis here to provide an opportunity for the community to point out any errors and, if accurate, as a resource for others in the future.

Incentives

BMW offers a number of incentive programs: loyalty, military, college grad, OL codes you obtain by attending events, etc. I won't try to detail them all but I will describe the incentives I personally qualify for, how they're valued on a 2021 M3 in April 2021, and how they can be combined with one another and BMW financing programs:

• Military Appreciation: $2500 if you do not finance with BMW FS, $500 if you do finance with BMW FS, stackable with Loyalty and CCA
• Loyalty: $500 if you do finance with BMW FS, stackable with Military and CC
• BMWCCA: $500 rebate if you've been a member for 6 months, claimed after delivery and paid directly, stackable with Military and CCA
• Corporate Incentive: $500 if you do finance with BMW FS, but not stackable with other incentives or rebates
• OL code: $1000 (technically $500 from BMW and $500 from the dealer, which means some dealers only honor BMW's $500 contribution on these), but I don't have a voucher

One interesting element of this is that some incentives are tied to using BMW Financial Services while the Military Incentive is much larger if you pay cash or bring your own financing.

Financing

Before getting into the options I should share my principle on financing: I try to allocate my money efficiently, which means doing whatever is cheapest considering the direct costs of borrowing (interest charges and fees) and opportunity costs of what else you could do with that money. To put it simply, I try to borrow as little as possible unless interest rates are a lot lower than what I can earn on my investments, in which case I try to borrow as much as possible so I can avoid dialing back savings and/or selling investments. (US stocks, based on the S&P 500, have earned 10.9% per year over the past 50 years or 13.9% per year over the past 10 years. Most financial advisors say it's safe to assume you can earn 6-8% per year.)

I have never leased a vehicle before but I've always been curious about it because it seems to provide drivers with a lower monthly payment and a call option (i.e., the right but not the obligation to buy the vehicle for a specific price at a specific time) which could have value if the market value of the vehicle is higher than the residual at the end of your lease. So one thing I tried to look at was how the financing cost of a lease + purchase compared to a simple up-front purchase.

I won't try to explain all the levers that impact the cost of a lease but I will call out that BMW's Multiple Security Deposit program can be quite attractive. BMW lets you put down up to 7 security deposits (a security deposit is equal to your monthly payment, rounded up to the nearest $50) which will be returned to you at the end of your lease. For each MSD they will reduce the money factor (interest rate) used to calculate your lease payment. Even at the relatively low money factors / interest rates we have today this program is still pretty appealing because by putting down a few thousand dollars you can reduce the interest rate charged on tens of thousands of dollars.

BMW also offers a "partial amortization" financing program in some states called BMW Select which provides drivers with a lower monthly payment for up to 5 years and then leaves you with a remaining balance equal to 25-35% of the original loan amount, which you can pay off in one lump sum or refinance through another loan. This kind of product can be quite "dangerous" for the average consumer if they do not prepare for the final balloon payment or appreciate the additional interest costs paid but with BMW offering very low interest rates (0.9% when I wrote this in April 2021) I think this is actually a very interesting way to keep money in my investments which are earning far more gains than the interest on an auto loan costs me.

I used Leasehackr's calculators to compute the cost of various lease options and BMW's Car Payment Estimator to compute the cost of various loan options. Here's what I came up with, assuming a $3500 dealer discount and qualifying for the incentives described above:

Lease with no MSDs: $74750 MSRP - $3500 dealer discount = $71250 net selling price - $500 military incentive - $500 loyalty credit = $70250 capitalized cost = $976/month with tax + $909 up front ($796 CA DMV fees and $113 CA taxes) - $500 CCA rebate + $350 disposition fee = $997/month effective.
If I want to buy the car after the lease, I will have to pay the agreed residual value of $42607 (57% of MSRP) and $3622 of sales tax. Financed at 1.49% for 36 months results in a payment of $1314/month in years 4 and 5.

Lease with max MSDs: $74750 MSRP - $3500 dealer discount = $71250 net selling price - $500 military incentive - $500 loyalty credit = $70250 capitalized cost = $941/month with tax + $909 up front ($796 DMV fees and $113 taxes) - $500 CCA rebate + $350 disposition fee = $962/month effective with 7 MSDs. (7 MSDs costs $6650 and this is saving me $1260 over three years, which is kind of like 6.3% per year. That's about the same as I can reliably earn on investments after income taxes so I could go either way on it, but the attractive thing is that this is a guaranteed savings whereas you never know what will happen with investments.)
Same situation as above if I want to buy the car after the lease - I will have to pay the agreed residual value of $42607 (57% of MSRP) and $3622 of sales tax. Financed at 1.99% for 36 months results in a payment of $1314/month in years 4 and 5.

Military Incentive with Third Party Loan: $74750 MSRP - $3500 dealer discount - $2500 military incentive (it's more if you don't finance with BMWFS) - $500 CCA rebate + $6056 taxes + $796 DMV fees = $75102 financed = $1292/month at 1.24% for 60 months or $1104/month at 1.89% for 72 months (these are PenFed's discounted rates as of April 2021 if you connect with a dealer via their TrueCar Car Buying Service)

BMWFS 60 Month Loan: $74750 MSRP - $3500 dealer discount - $500 military incentive - $500 loyalty - $500 CCA rebate + $6056 taxes + $796 DMV fees = $76602 financed = $1306/month at 0.9% for 60 months

BMW Select 60 Month: $74750 MSRP - $3500 dealer discount - $500 military - $500 loyalty - $500 CCA rebate + $6056 taxes + $796 DMV fees = $76602 financed = $884.53/month at 0.9% (BMWFS) plus a $25863 balloon payment due at the end of year 5
Balloon: $25863, refinanced at 1.49% for 24 months = $1100/month.
BMW anticipates two options at the end of the five year loan: you either sell or trade in the car, which hopefully is worth more than your remaining balance, or you refinance the residual balance with a new loan. Assuming I want to keep the car, for the purpose of this exercise, I assumed I would finance the remaining balance at 1.49% for 24 months (one of my credit unions, Digital Credit Union, offers really low used auto rates). This results in a payment of $1094/month in years 6 and 7.

I looked at the pure financing costs of each scenario:

• If buy up front with PenFed 60 month 1.24% loan: $918, net of extra $1500 rebate (if you finance via a third party the military incentive is $2000 higher but you lose the $500 loyalty incentive)
• If buy up front with BMWFS 60 month 0.9% loan: $1758
• If buy up front with BMWFS 60 month 0.9% Select loan then refinance balloon for 24 months at 1.49%: $2333 + $393 = $2726
• If buy up front with PenFed 72 month 1.89% loan: $2886, net of extra $1500 rebate
• If lease for 36 months then turn in the car: $4642
• If lease for 36 months then finance buyout on 36 month 1.49% loan: $4642 + $1075 = $5717

It looks like buying up front with third-party financing is the least expensive option and leasing or lease-to-buy is the most expensive option. I was pretty surprised by this since the Leasehackr calculator said the money factors used for BMW leases were equivalent to 1-2% interest rates. I guess the various fees involved in leasing (e.g., $925 acquisition fee, $325 disposition fee) add up and you are paying to finance the full value of the car.

Leasing seems to only make sense if I expect the market value of a 2021 M3 in 2024 to be $3750 higher than BMW's residual value estimate of $42607. If it was I could sell the car private party or trade it in to a dealer like Carmax for more than my residual value and the profit on that sale/trade would reduce some of my out of pocket cost for the lease. That doesn't seem like a great bet to me, especially with the controversial styling of the 2021 M3. I have never leased before but I understand BMW residuals tend to generally be set higher than typical market values to make leases cheaper, so underestimating the residual value by 5% would be a big miss for BMW.

I think BMW Select is the best option when BMW is offering interest rates as low as 0.9%. I can reduce my monthly payment by $422 relative to a conventional 60 month loan and keep money invested earning a much higher rate of return. I think there are four ways to deal with the residual balance: (1) sell the car to pay off the loan, (2) finance the residual balance for an extra two years at a pretty low rate, (3) put $360/month into investments which should add up to enough money by the end of the term to pay off the balance or (4) put $17,500 into investments (instead of, say, a $25K down payment) on day one and let it grow over five years into enough money by the end of the term to pay off the balance.

For those of you who have used BMW Select before - what has been your experience?
It feels like leasing should be cheaper since it's so popular - what am I missing, other than the ability to turn in the car every 3 years?

I hope someone gets value from me writing all of this out.

[chicagofan00]

I plan on giving BMW Select a try for the first time with my G80. Remains to be seen how good of a decision that will be in the long term!

[LuckyBrand]

I would be interested as well in others who may have done the select financing.

[acre22f90]

Leasing still looks very attractive to me on the sell option at the end alone (protection from accident depreciation another). I have a really tough time believing this car to be worth low to mid 40's after 3 years. That would be a significant difference from F80 depreciation. In this case, I do NOT think BMW is smarter than us here.

There isn't a 2017/2018 F80 within 500 miles of Chicago for sale less than $50,000. (I know, different car, but still a very large assumed delta)

[jimbethesda]

You need to compare returns with comparable risks. The lease/loan interest rate should be compared with riskless returns, such as FDIC insured bank deposits or Treasuries. I assume, and hope, you're not 100% invested in stocks.

Car loan rates are almost always higher than the risk free return unless the car manufacturer is subsidizing it in order to increase sales.

[Multimodal]

Originally Posted by jimbethesda

You need to compare returns with comparable risks. The lease/loan interest rate should be compared with riskless returns, such as FDIC insured bank deposits or Treasuries. I assume, and hope, you're not 100% invested in stocks.

Certainly not - there's a good bit of cryptocurrency and angel investments in my portfolio too. Is that what you mean?

[jimbethesda]

Originally Posted by Mr. Maboomba

Certainly not - there's a good bit of cryptocurrency and angel investments in my portfolio too. Is that what you mean?

Are those riskless? (Hint, no). I used stocks because you cited their expected returns in your post about opportunity costs.

Crypto and angel are going the wrong way on the risk curve to compare to loan rates.

[Transfer]

Wow very impressive breakdown and analysis. You did a lot of work here and documented it well! I agree that if you're keeping the car for 5+ years, BMW Select at low rate now makes a lot of sense. Is BMW Select available in all markets?

Traditionally I have been leasing because I only pay tax on lease payment which at 10% here represents $5200 that stays in my pocket for the first 3 years ($91k build). I also I get the itch for a new car every 3 years (or less) but I'm hoping that my dream AWD M3 will keep me satisfied much longer this time.

[MJO316]

Originally Posted by ACremona22

Leasing still looks very attractive to me on the sell option at the end alone (protection from accident depreciation another). I have a really tough time believing this car to be worth low to mid 40's after 3 years. That would be a significant difference from F80 depreciation. In this case, I do NOT think BMW is smarter than us here.

There isn't a 2017/2018 F80 within 500 miles of Chicago for sale less than $50,000. (I know, different car, but still a very large assumed delta)

2018 was post LCI. I looked it up 2017 is rare over 50K. The M4CS 2020s are selling for 78-80K.

The LCI is going to hammer this car because of the new idrive and what potentially could be a huge dashboard and cluster change. Not to mention the M3 is getting a taillight re-design and who knows what else.

Look it up. Idrive 8.

I'm so lost right now with whether I'm leasing it or not.

[acre22f90]

Originally Posted by MJO316

2018 was post LCI. I looked it up 2017 is rare over 50K. The M4CS 2020s are selling for 78-80K.

The LCI is going to hammer this car because of the new idrive and what potentially could be a huge dashboard and cluster change. Not to mention the M3 is getting a taillight re-design and who knows what else.

Look it up. Idrive 8.

I'm so lost right now with whether I'm leasing it or not.

M4CS was overpriced, and I don't think a fair enough comparison as its a special model.

We have a production shortage now with options potentially missing on 2022 models. (TBD)

Also in my search, 10 out of 53 total 2017 BMW M3 (Pre-LCI) listings are $50,000+. (Nationwide search via cargurus.com)

All I am saying is, 57% residual is wrong IMO (grossly overestimated on depreciation). But time will certainly tell the truth.

[Multimodal]

Originally Posted by jimbethesda

Are those riskless? (Hint, no). I used stocks because you cited their expected returns in your post about opportunity costs.

Crypto and angel are going the wrong way on the risk curve to compare to loan rates.

Obviously I am kidding but I appreciate the sober attempt to help.

I have a difference of opinion on whether one needs to compare to risk-free investment returns. While that is true in theory because loan payments will be due no matter what, I think that is overly conservative. I believe one needs to compare to likely investment returns on an after-tax basis in order to have the most accurate forecast of what will happen. I wouldn't set my borrowing threshold at the 46.5% pre-tax return the S&P has returned over the last year but I do think it's reasonable to compare to the the long-term average of 6-8% pre-tax or 5.1-6.8% after-tax.

[Multimodal]

Originally Posted by Transfer

Traditionally I have been leasing because I only pay tax on lease payment which at 10% here represents $5200 that stays in my pocket for the first 3 years ($91k build). I also I get the itch for a new car every 3 years (or less) but I'm hoping that my dream AWD M3 will keep me satisfied much longer this time.

That is a good point - leasing lets drivers avoid paying more than half of sales taxes in states that tax only the lease payment. I need to revise my analysis to value that.

[Multimodal]

Originally Posted by MJO316

The LCI is going to hammer this car because of the new idrive and what potentially could be a huge dashboard and cluster change. Not to mention the M3 is getting a taillight re-design and who knows what else.

Look it up. Idrive 8.

I'm so lost right now with whether I'm leasing it or not.

This is my biggest concern with buying this model at this time in particular. That said, while I don't think the residual value will be in the $50Ks in three years, I also can't see it being in the $30Ks, especially the way the Fed continues to print money (inflation is coming). I am pretty confident that a 2021 M3 6MT will still be worth $40Ks in 2024. There is a lot of price support in the $40Ks for an M3 - a lot of second-hand value buyers in that range.

[jimbethesda]

Originally Posted by Mr. Maboomba

Obviously I am kidding but I appreciate the sober attempt to help.

I have a difference of opinion on whether one needs to compare to risk-free investment returns. While that is true in theory because loan payments will be due no matter what, I think that is overly conservative. I believe one needs to compare to likely investment returns on an after-tax basis in order to have the most accurate forecast of what will happen. I wouldn't set my borrowing threshold at the 46.5% pre-tax return the S&P has returned over the last year but I do think it's reasonable to compare to the the long-term average of 6-8% pre-tax or 5.1-6.8% after-tax.

I figured. You seem to fully understand, most don't.

[jonahk]

Originally Posted by Mr. Maboomba

I hope someone gets value from me writing all of this out.

I do.

These conversations are fun, and your post is a great example of looking at ALL the options not just a monthly payment.

FWIW this is the exact process my wife (CFO) and I went through to make the decision. Your numbers were very close to ours (I had some corporate discounts available that are somewhat like your military discount).

We happen to be in a position where we have some cash that isn't doing much now (trying to adjust positions so we aren't over-extended on stocks) and decided to make a significant down payment to keep our monthly expenses low on the loan.

I spent days pouring over amortization tables to figure out how residual values compared and when I'd be at a point to where if I had to dump the car for one reason or another I'd be ahead and have a bit of equity. That was the kicker for me. Combined with the down payment if something came up where a G80 no longer made sense it would be an easy transition.

It came down to "at the end of 36 months did I rent the car or potentially have some equity in it at that point?"

That option isn't for everyone but it fits our 5 year financial plan perfectly to go that route over leasing.

[Multimodal]

Originally Posted by jimbethesda

I figured. You seem to fully understand, most don't.

And that there is the biggest risk of programs like BMW Select. The state of financial comprehension in the US (or heck the world) is very low. Being upside down on your loan due to a slow amortization schedule and facing an unanticipated balloon payment could really hurt some people.

[acre22f90]

Originally Posted by Mr. Maboomba

This is my biggest concern with buying this model at this time in particular. That said, while I don't think the residual value will be in the $50Ks in three years, I also can't see it being in the $30Ks, especially the way the Fed continues to print money (inflation is coming). I am pretty confident that a 2021 M3 6MT will still be worth $40Ks in 2024. There is a lot of price support in the $40Ks for an M3 - a lot of second-hand value buyers in that range.

Any reason you predict this when 40 of 53 listed 2017 M3 are above $50,000?

[Multimodal]

Originally Posted by jonahk

It came down to "at the end of 36 months did I rent the car or potentially have some equity in it at that point?"

That option isn't for everyone but it fits our 5 year financial plan perfectly to go that route over leasing.

I'm glad to hear you found it interesting and went through a similar exercise yourself!

So what did you decide - BMW Select?

[Multimodal]

Originally Posted by ACremona22

Any reason you predict this when 40 of 53 listed 2017 M3 are above $50,000?

The right comparable would be to look at what 2015 M3s were selling for in 2018 (if anyone remembers). The 2017 is the second-to-last model year for the F80, it benefitted from the first LCI and the desirable Competition Package, and we are currently in a really bizarre used car market. The price of used cars overall has gone up over the last 12 months. The F8x (M2, M3 and M4) has gone up in particular because the G80 is so controversial that many people are keeping their F80 or coming off the sidelines of the used market to buy one. Inventory is super low right now.

On the bright side, the G80 will only get better from here. On the downside, these first year models will always be the least desirable in the used market and are likely to have a depreciation discount because of that.

My gut says we'll see these cars selling in the mid $40Ks in three years. Which means the residual is pretty accurate and leasing is probably more expensive than purchase financing.

[Murf]

Great conversation, thank you for doing the research as I am in this boat as well. Leaning towards Select as well using all the same arguments and the fact that I tend to hold cars 5-6 years mainly because I only drive 6k miles a year.

Couple of things to consider though -

Forward returns are likely to be lower on average due to removal of stimulus and the coming moderation in growth. I won't go into particulars but many models including Schiller imply a range from -5% to 5% on returns with several suggesting a 5 year return of 1-2% at best. Just pointing it out if it's being used as the basis for comparisons.

Used car rates are being artificially inflated due to the myriad chip shortages and logistical disasters being encountered in the auto industry. So direct comparison of residuals vs used F80 values is probably not valid until this is worked through.

I am curious if this is impacting residual calculations for new vehicles - does anyone know what influences this calculation?

https://www.usatoday.com/story/tech/...ms/4849838001/

[Multimodal]

Originally Posted by Murf

I am curious if this is impacting residual calculations for new vehicles - does anyone know what influences this calculation?

Accountants in Woodcliff Lake, NJ, I assume.

Seriously, though, a troll through Leasehackr and other forums will reveal historical residuals. I saw one post that in October 2017 BMW had a 61% residual on 2018 M3s for a 36 month, 10K mile/year lease. That would have translated into about $47K today which is too low relative to current market conditions but as others have said the used car market is currently distorted/inflated.

[barryc365]

Originally Posted by jonahk

I do.

These conversations are fun, and your post is a great example of looking at ALL the options not just a monthly payment.

FWIW this is the exact process my wife (CFO) and I went through to make the decision. Your numbers were very close to ours (I had some corporate discounts available that are somewhat like your military discount).

We happen to be in a position where we have some cash that isn't doing much now (trying to adjust positions so we aren't over-extended on stocks) and decided to make a significant down payment to keep our monthly expenses low on the loan.

I spent days pouring over amortization tables to figure out how residual values compared and when I'd be at a point to where if I had to dump the car for one reason or another I'd be ahead and have a bit of equity. That was the kicker for me. Combined with the down payment if something came up where a G80 no longer made sense it would be an easy transition.

It came down to "at the end of 36 months did I rent the car or potentially have some equity in it at that point?"

That option isn't for everyone but it fits our 5 year financial plan perfectly to go that route over leasing.

I'm in the same boat. Can I ask if you came up with a magic number for a down payment?

I'm thinking $30k down makes the payment the same as the lease. That way I'm confident I'd get the $30k back when I sell it in 3 years and clear the balance

Any thoughts

Great thread and Information OP!