BiggerPockets

Are car loans really that bad?

60 posts by 26 users

Sam Craven Verified

Real Estate Investor from Houston, Texas

Feb 05 '13, 02:07 PM


Here is an entirely different viewpoint with a more analytical approach:

Im 27, i own 4 cars, only 1 with a payment and not a single one has less than 100K miles. 2 of them have over 200k miles.

The one with a payment i purchased just over a year ago, when i started my sales job.

2007 335i sedan It was worth $24k when i got it for $20k. I put $3k down, and have driven it about 37k miles in 13mo.

What drove my decision? I LIVE IN MY CAR (pretty much) and I have a background working for professional race teams and i turned wrenches to pay for college so i really enjoy driving. This was important to keep my sanity on the road. Last sales job they provided me with a Charger and i would come home from a day on the road and feel tired. Now i come home energized and happy to see my wife.

The economic decision:
i went back and looked at how the 3 series BMW has depreciated. The easiest thing to do is look at what they leased for NEW. Manufacturers and dealers put a lot of work into assuming a certain amount of depreciation and wear and tear and they assign that value to it in the form of the lease payment. I also looked at other cars with high mileage and got an estimated % of depreciation per year. (came up with 14%, pretty high for an already 5yr old car but its German and i am packing on the miles).

After doing the math if i needed to sell it at any year within the 4 year loan i would get about 125% back year over year. It also helps that i am paid mileage that covers not just my payment but tires wear and tear. (for 2012 i netted $800 in the black)

Now I'm planning to quit the job and jump in RE full time in 2 mo after my marketing shows signs of consistency, (need 2 more months of 3 house purchases a mo). When this happens it becomes a much larger liability as i am on the hook for all payments.

Will just have to see how things are looking then and decide if i will sell. If i sell, will most likely find something i can pay cash for that is still fun to drive and more economical than my V8 land cruiser.



Medium facebook profile logoSam Craven, Senna House Buyers
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Investing in Houston Real Estate


Sam Craven Verified

Real Estate Investor from Houston, Texas

Feb 05 '13, 02:13 PM


I guess my overall point is: Cars are A LOT more of an emotional decision than a logical one. But that doesn't mean financing one is wasteful, and that doesn't mean a nice(r) one can't actually improve your life.



Medium facebook profile logoSam Craven, Senna House Buyers
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Investing in Houston Real Estate


David Robertson Verified Video

Flipper from Kansas City, Missouri

Feb 05 '13, 02:15 PM


On the topic of "beater" vs new/semi-new car. Another thought that has to do with perception......I have been driving a 2001 Pontiac Grand Prix since my Senior year in high school. At this point the car has 2 broken tail lights, a broken side mirror hanging off the side, rust on the bottom panels and just stopped running 2 days ago...this is a textbook "beater"...

I have finally run my car into the ground, but I wonder how I have been perceived by my associates at work and other business professionals that I might encounter in my real estate dealings because I drive a POS? What's the first impression I give off when I meet new people? Does what I drive effect my business? Would a private money lender lend money to me if I pulled up in a "beater"?

Have I saved money? Yes...but have I missed out on potential business opportunities or relationships because of perception?......

...Makes me wonder...


Edited Feb 5 2013, 14:27 by David Robertson


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Kyle Hipp

Residential Landlord from Appleton, Wisconsin

Feb 05 '13, 03:08 PM


I think we look at things in a vaccuum too often. I think everybody understands that if I have a $20,000 car loan at 2% and take the $20,000 in cash and put it in an investment making 5% it is better off mathmatically. This is a personal finance question, finance is maybe 10% of the equation, personal is the other 90% and I don't see that being weighted correctly. I don't know how much anyone on here has studyed the intricicies of some of the financial products such as the various derivatives and credit default swaps, these products are absolutely fantastic on paper, I mean the math is beautiful...

At the end of the day it is real life that takes effect and the missing metric is risk. Risk isn't taken into account when we say things like I can get a loan at 2% on a depreciating asset and invest at 5% and my life looks a lot better 5 years doen the road. I see it as just having too much risk, having a car loan. I purchased a very nice 5 year old SUV last year with 70,000 that meets all my family's needs for $10,000. It was too much in my mind but it was for the wife so I have a hard time saying no with all the help she provides for me. My truck is 17 years old, that I got from a guy at work for $4,000. I can do anything with it. By biggest saving is on insurance. I don't have to buy full coverage which fits my needs perfectly. Something happens, I can come up with another couple grand pretty easy because my expenses are so low. By not having comsumer debt, I need to make maybe $100/week to survive in my current lifestyle which isn't half bad if I do say so. This actually came in handy for me recently as I suddenly left my job last November. Besides health insurance, it wasn't a big financial stress because I have such low expenses. I was able to land a job and start within 4 weeks, and then get an even better job in pay and benefits that I start next week. Having low expenses and not having any consumer debt made this possible. This piece of mind changed the way I was able to look for new employment. Changed the way I was able to quickly use the free time to improve my rental business. Changed the way I was able to spend time with my family. Changed the way I was able to interact wduring interviews. It is control and if I had taken a loan for that SUV and had an extra $300+ month payment it would have been more stressful. Not to mention the fact that I could have looked at that SUV purchase and said well since I am borrowing anyway, why not take that great deal on this 2 year old SUV for $20,000. After all it's only 3%, I can invest my $10,000 in cash for 6% and I have everything I wanted with no cost. Well that $500 a month payment would have made these last couple months a lot different.



Aaron Norris Verified

Rehabber from Riverside, California

Feb 05 '13, 04:03 PM


Great point @David Robertson. I wonder if there's a class of cars that are in between. I don't think showing up to a rental in a BMW is necessarily a good idea but meeting a private money investor in one would. It really depends on your core business. Most of our most successful real estate pros don't drive a super fancy car out in the field. We have one friend that finally gave up his truck at 500,000 miles.



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James H.

SFR Investor from Texas

Feb 05 '13, 04:53 PM


@Kyle Hipp,

If you had borrowed the 10K for your SUV and had a payment of 185/month assuming 4.25% interest rate, you could have easily made that one payment with the 10 grand you had sitting in the bank. heck, you'd have that payment for next 55 months...So you might have a little higher insurance that would push it down to maybe 48 months. Plus, if you really want to talk worst case scenario and self protectionism, if things really got bad, you could let the SUV go back and have 10K to feed yourself.

I think in our hard lessons learned from being hurt by debt or seeing others hurt by debt, we have skewed our logic so far to the other side as to not see a situation for its actual risks and rewards. I agree that people make this kind of decision as 90% personal, but I don't agree that this is correct logic.

Finally, if you are okay with an unsecured note to make a DP on a property such that you have 100% financing on the property that will have low cash flow to break even for the first 5 years but cash flow like crazy after the unsecured note is paid off, most astute investors would do that and work on maybe paying that note back quicker. To me, a car note with a great term is no worse than an unsecured note with a great term. So many people willing to jump on hard money lenders for loans, yet the same ones (many of them) would balk at car note. It makes no logical sense.



Kyle Hipp

Residential Landlord from Appleton, Wisconsin

Feb 05 '13, 05:55 PM
1 vote


That worst case is eroding my core. My base to be effective. If I lose a vehicle, that wrecks my credit. If I lose my vehicle and I no longer have any cash, that leaves me without a vehicle. It is hard to impress a tenant or new employer or banker rolling up on a schwinn or taking the bus. With purchasing that vehicle in cash, if worse comes to worse, I can cut back my extras such as cable or scale back phone service and no eating out blah blah blah and be fine. Then if I need to my credit would still be good and if I had to Incould sell that SUV to bring out cash and get a $2,000 beater and still have cash and good credit.

I think a lot of this is all sematics if one has a solid emergency fund. This way you again have control because you have $15,000 - $20,000+ in case anything happens but again I would have that amount above any consumer debt held. I understand your comparison to an investment property loan. I mitigate that risk by having prudent business practices. I have personally never taken a hard money loan and at this time do not plan to. In a flip situation I would consider it but at this point I do not feel I have a solid enough base to take such a risk. I also have adjusted my original 30 year note strategy to a 15 note strategy. This lowers my cashflow but also is less risky in that it reduces my principal owed greatly and gives me more options. With a 15 year note I am able to have much greater flexability in my future financing options because my balance is lower. If something was to happen were I lost my job and I was 3 years into a 15 year note on an investment property that I put 20% down on and repaired and remodeled for best results quickly I can still qualify for a commercial loan, possibly pull out cash. Or at the very least have a property that helps my ratios and improving noticibly monthly as well as still providing adequate cashflow.

It is a struggle sometimes to properly manage risk as well as continue a growth path. I for one am looking to be a fulltime real estate investor within 10 - 13 years with no need for a day job. I am willing to sacrifice the nicer car and many other things for down the road. I see this as the best path for me and it might not be for you. Your goals and strategies can be different and still allow you to accomplish your goals. I guess I am more comfortable with my worst case. I don't mind willing explain to an investor, banker, or tenant that I left my job quickly and was still able to accomplish this or that. Again in that case I have the option to disclose that. If I have a vehicle repossessed, that is not something I would feel good about explaining to an investor, banker, or tenant.

In the end, I believe it is a personal decision that one must look at an examine. Any decision I make I try to look at the ramifications with a long term view. So many times it is easy to get caught on the next 6 months or a year but it is essential to see how a decision fits into your goals 5 years and 10 years down the road and many times even longer.

Good topic ;)



Carlos Flores

Real Estate Investor from Dallas, Texas

Feb 05 '13, 06:15 PM
2 votes


I buy at dealer auction, drive inventory, then transfer the title to the end buyer when I'm done with it. Generally for cash, unless they use outside financing. No, I'm not a dealer. One of my businesses actually holds the used car dealer license. :-)

With that said, years ago we did finance a car at 2%. Typical credit union savings accounts rates paid higher then. 2% seemed like free money at the time even though I knew it wasn't. Would I recommend sub 2% money to finance a car? As we've seen in this thread, it depends on the individual situation. If you need the car to work or for your family, and you're w/in your means, then it can make sense ... especially if you need a $10k car and don't have the cash to buy one.



Medium dreamstime l 17553651   copy crCarlos Flores, Stronger Communities Alliance, LLC
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Brandon Turner Verified Video

from Montesano, Washington

Feb 05 '13, 07:08 PM
1 vote


I think I'll throw my hat into the discussion as well, as I - like @David Robertson, need to buy a new car this week because mine is falling apart.

I believe I should have been saving for the past few years. But I didn't.

So, now - I'm selling a house and about to clear about 10k. I could use that 10k to buy a car, outright (or at least most of one) OR I could add it to my emergency fund.

I think I'm going to put it in my emergency fund, and bite the bullet with a $250 per month car payment. Get myself a nice little 2007 Prius with 90,000 miles and save at least $100 per month in gas charges. Yes, the money sitting in the bank will be earning next-to-nothing - but there is one factor no one has brought up yet: The Wife Factor.

My wife will sleep better knowing we have an extra 10k to cover emergencies than not having a car payment.

Of course, we could go buy a 2k beater and have just an extra 8k in an emergency fund - but that puts me back in the same spot I'm now, with a car that's costing me more in repairs than a car payment would.

My 2 cents anyways!



Medium bp squareBrandon Turner, BiggerPockets
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William Bannister

Commercial Landlord from Oshkosh, Wisconsin

Feb 05 '13, 07:58 PM


Im going to agree with the posts up here on beater cars. They actually arent dependable to get your job done in real estate. I drive cheaper cars not beaters. Well if a car with 75,000 miles on it is a beater then maybe I am wrong then.
The key is get a car that is at least 4 years old the depreciation is significantly less after they are 4 or 5 years old and they still have life in them.
I go to police auctions and buy them with about 50,000 to 60,000 miles on them. I spend between 3 and 4k sometimes a little more if I decide to put new rubber on it before I take to the road. I suppose some people may claim in order to feel good about themselves they must have a nice set of wheels. Others feel wealthy in a nice car. I am worried behind the wheel of a nice car it might get wrecked, something so expensive. So I keep driving older cars..



Joel Owens Verified Moderator

Commercial Real Estate Broker from Canton, Georgia

Feb 05 '13, 09:10 PM
1 vote


Just an idea.

You can have 2 cars for real estate.

One is a beater that you drive around to look at properties and also in rougher areas that gets good gas mileage.

Then you have nicer car for professional business meetings and family outings that you put less miles on so it doesn't depreciate and get worn down as much.

I also know the owner of a limo company and he gives me great deals when I want to go on vacation and a drive to the airport or picking up clients to show properties to or going out for a nice dinner etc.



Medium allworldrealtyJoel Owens, All World Realty
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Sandy Blanton

Real Estate Broker from Pensacola, Florida

Feb 05 '13, 09:47 PM
1 vote


We Americans love automobiles. My take: the average American millionaire (from one of our best books: The Millionaire Next door) drives an auto worth $25K. The most common purchase was a used Ford Truck or Lexus.

Suze Ormon says pay cash if feasible, but never finance for more than 3 years.

Dave Ramsey says pay cash always and spend no more than 6 month's income.

My next auto will be a 2 year old Cadillac Coupe CTS. It'll cost $35K, I think the new price is near $50K. It's total cost of ownership is rated excellent by Intellichoice dot com. I'm not buying until I have cash.

Most financial gurus say you'll naturally spend more on a car/depreciable asset if you finance it. I think this makes a lot of sense. My thoughts. IMO:)



William Bannister

Commercial Landlord from Oshkosh, Wisconsin

Feb 05 '13, 10:03 PM


I live by most of Dave Ramsey advice except his take on gold and silver. his take on gold to me just doesnt add up.
I like buying houses with cash even if I am not doing 10 a year.
It just seems fewer people get there homes and cars foreclosed and reposed that arent making pmts.
If your really that worried about how you look when you go to a meeting then park a block away. I think most intelligent investors actually would respect a lesser car as a form of frugality.
I do understand everyones great desire to have nice wheels I have some nice wheels even though I never get to drive them since its a 2 seater and we have 3 in our family. lol



Jon Klaus Verified Moderator Donor

Real Estate Investor from Garland, Texas

Feb 06 '13, 05:12 AM


Dave Ramsey says pay cash always and spend no more than 6 month's income.

This seems kind of liberal for a Ramsey position. At least for moderately successful people. After college I set a rule of thumb for myself to not spend more than 2 months income on a car. The rule worked for me when I didn't make much, and still works as my income has increased.

Here's a more general rule. Drive whatever you want as long as you can easily afford it.

Cheap financing Is OK. Personally, I don't like the full coverage insurance costs, but you can avoid that if you are using a HELOC or the like. I know that's another can of worms, but again, if you can easily afford it, it's OK.



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Rob K.

Real Estate Investor from Southeast, Michigan

Feb 06 '13, 05:45 AM
1 vote


As long as we're discussing cars, I would like to add a few things.

We have three vehicles for two drivers. Having an extra car is nice if one is being worked on or if you want to sell one and take your time buying a different one. It takes the pressure off of having to pay too much.

As far as car insurance, shopping around can save you a LOT of money. I'm paying $154 per month for full coverage on three vehicles. It's through a company called Encompass, which I believe is a division of Allstate. I did have one claim and was very happy with the way it was handled. I know that car insurance varies greatly depending on your age, state, zip code, and driving history. It's worth it to make a few phone calls and compare.

I would recommend anyone who has kids to look for safety over gas mileage. My three vehicles all have full frames. Sure, I pay more for gas, but in an accident, I want my kids to be safe. If the other vehicle is tiny and they leave in an ambulance or a bag, that's their problem. I would much rather be the bigger vehicle getting hit by the smaller vehicle than vice versa.



Rob K.

Real Estate Investor from Southeast, Michigan

Feb 06 '13, 05:47 AM
1 vote


Originally posted by Sandy Blanton:
Dave Ramsey says pay cash always and spend no more than 6 month's income.

This would apply if you only had one vehicle in your household. Dave says that the total value of all of your vehicles should be no more than six months household income.



Ben Leybovich Video

Real Estate Investor from Lima, Ohio

Feb 06 '13, 06:35 AM


Brian Hoyt As I see it, the problem with consumer debt, of which car loan is one example, is that the debt service is accomplished with pre-tax cash in most cases. For example, a $400/mo. car payment doesn’t just cost $400/mo. One needs to earn money, then pay taxes on those earnings, and then have $400/mo. to spend on the car. Thus, for someone with an effective tax rate of say 30%, the income necessary to accomplish a $400/mo. payment is actually $571.43/mo. or $6,857.16 per year. The question becomes – can this money be spent more wisely, and I think you would agree that it could. If you must finance a car, run it through your business at least.



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James H.

SFR Investor from Texas

Feb 06 '13, 06:42 AM


Originally posted by Ben Leybovich:
Brian Hoyt As I see it, the problem with consumer debt, of which car loan is one example, is that the debt service is accomplished with pre-tax cash in most cases. For example, a $400/mo. car payment doesn’t just cost $400/mo. One needs to earn money, then pay taxes on those earnings, and then have $400/mo. to spend on the car. Thus, for someone with an effective tax rate of say 30%, the income necessary to accomplish a $400/mo. payment is actually $571.43/mo. or $6,857.16 per year. The question becomes – can this money be spent more wisely, and I think you would agree that it could. If you must finance a car, run it through your business at least.

Point taken, but I feel that is splitting hairs. You need earned income to buy the car in lumpsum as well. So that 30% taxes being paid on the monthly car note is only marginally higher based on the increased interest. If you have a 3% interest rate on a 15K car, your finance costs are less than 500/ year. So the taxes on that additional earned income you need to pay is only 150/year. It's something, but when you are talking about the decision to absorb that cost and invest the 15K into real estate or to just pay cash for the car and wait and save up another 15K to invest, then I think the option is clear (to myself) that financing the car is a better decision.



Pat L.

Real Estate Investor from Upstate, New York

Feb 06 '13, 06:52 AM


Originally posted by Rob K:

I would recommend anyone who has kids to look for safety over gas mileage. My three vehicles all have full frames. Sure, I pay more for gas, but in an accident, I want my kids to be safe. If the other vehicle is tiny and they leave in an ambulance or a bag, that's their problem. I would much rather be the bigger vehicle getting hit by the smaller vehicle than vice versa.

absolutely !!!
I have a picture I keep of 4 local kids who hit a tractor trailer head-on in one of our make of SUV's they all walked away.
All of our kids drive full frame SUV's & we paid cash but maint is minimal on them.
We own 3 ourselves, 2 are fully deductible, both were 179 deductions.
One has 200,000 hard business miles on it, it gets 18mpg but I have only done preventative maint, brakes tires & (3) $89 back door latches!!!
But I am now considering leasing, we no longer do the mileage, it's deductible & the cost is definitely not an issue.



John W.

Real Estate Investor from Texas

Feb 06 '13, 07:02 AM


good discussion here and valid points from different viewpoints. just to get it out there, i like to pay cash, but can see how if you have 15K and a great opportunity comes along, use the 15k for the investments and finance the car. I still think then you should pay it off rapidly (less than 3 years).
I see the math, if you pay 2% on a car loan and earn 10% elsewhere, then you are better off that way, but its not just about math. how about options? when you owe money, it takes away your future options.
another thing, if you commit to paying interest on that car, that is garunteed. you are not garunteed for that investment to turn out the way you want. as you know Brian, you paid cash for your first purchase. if you had some big bills come up on it, you didnt also have the bank to pay back.
Brain could also say, if he uses all of his cash on a vehicle, then he doesnt have options of an investment until further down the road.
how about this? build an emergency fund to smooth this whole thing over. because lets say you finance the car at 15k and use the 15k to purchase a property. then you have car trouble (or other bills for that matter) and not only do you have payments, but now you have other bills without options. gotta pay that payment. for me, i like to have options and a peace of mind.



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