No, you’re not reading Consumer Reports or Motor Trend. But believe it or not, your choice of car can have an impact on your level of real estate investment success. This is because your choice of car makes an impression on people, and you always want to make the right impression. And of course, since cars are wasting assets – they very rarely rise in value – the less money you spend on them, the more you’ll have to invest in more practical things – like your next deal.
I was thinking about this recently because my wife and I are buying a car. We’re replacing the old Subaru Outback with… drum-roll, please… another Subaru.
What kind of impression do we want to leave with your tenants and anyone else with whom we have financial dealings? They should think of us as practical. As smart. As careful with a dollar. We want to present these impressions because we are battling a stereotype. That stereotype, of course, is that we are all rich – that we don’t actually have to work that hard – that because we own real estate investments, money comes easily to us. That a few bucks here and there aren’t that important to us. That when we haggle over money, we’re just being jerks.
Making the Right Impression
Don’t let your tenants see it! –>
Even if you are rich and don’t have to work that hard – good for you! – you almost certainly don’t want your contractors and especially your tenants to think so. Again, if they think so, your contractors are much more likely to overcharge you. Your tenants are much more likely to try to make late payments or take advantage of you in other ways. Of course you’re not going to allow this, but why deal with the hassle?
What does that mean to your car-buying decision? Well, first of all, it doesn’t mean you can’t have that Lexus or Porsche. It just means you shouldn’t ever take that car anywhere for business. And it also doesn’t mean you can’t be comfortable. Even my little future Subaru has heated seats, power windows, and so on.
Peoples’ impression of your car will be completely driven by the exterior, and in particular, the brand. That means an old luxury car or sports car will seem “richer” to your business contacts than a new non-luxury model. I would avoid all luxury brands. You especially want to avoid all sports cars. In addition to perpetuating the “rich playboy” stereotype, they just aren’t that practical for landlording.
If you must have a luxury brand, go American, and more than a few years old. An eight-year-old Lincoln or Cadillac will usually be beat up enough to not look overly impressive.
The most practical landlording vehicles are often pickup trucks, vans and SUVs. They never look ostentatious unless they’ve been tricked out with deer antlers and so on (think J.R. on “Dallas). They can carry a lot of stuff. Vehicles with four-wheel-drive can get almost anywhere.
Not only that, but if you really want to spend a lot of money for a comfortable and luxurious ride, a pickup truck can now be as comfortable as any car. But from the outside, it just looks like a pickup truck – not a bling-mobile that will send the wrong message.
So why aren’t I buying a pickup truck? I’d actually love to have one, but the little Subaru will hold everything I need for 99% of my landlording efforts. Of course this includes maintenance projects. It’ll also haul my two kids. If I need to tote a washing machine or something else equally bulky, there’s my wife’s Honda Pilot. However, the Subaru will get much better mileage than any of those other choices. And it sure doesn’t look ostentatious.
A Good Car is a Good Value
I define a good value as everything I need for the lowest possible price. Something that doesn’t suit my needs isn’t a good value – that’s why I won’t buy an old clunker that’ll leave me stranded 30 miles from home at midnight.
Once you’ve determined the best kind of vehicle, the next thing to consider is ownership costs. This is a combination of two factors. The first factor is cost of operation – gas, maintenance, and insurance. The second is depreciation. If you are like most small landlords and use your vehicle for both business and personal purposes, you probably figure your vehicle tax deduction based on mileage. The government includes cost of depreciation in the per-mile deduction – it’s currently 21 cents per mile for depreciation out of a total deduction of 50.5 cents per mile for the first half of 2008, 58.5 cents per mile for the second half. But in reality, cars obviously lose value at different rates. The most luxurious tend to lose value the fastest.
For example, let’s take a look at a couple of flashy rides from high-quality brands. A new BMW 528 will set you back about $55,000, but the five-year-old equivalent will be only about $21,000. A new Lexus LS 460 runs about $88,000. But the five-year-old is only $22,000. The BMW has lost more than half of its value (assuming a 2004 BMW cost less when it was new – it wasn’t that much less). The Lexus has lost almost 3/4 of its value.
By comparison, the Toyota Corolla is one of the most reliable and durable cars you can buy. (I’m not considering one, only because I really want the Subaru’s all-wheel-drive.) A new one will run about $15,000. The 2004 equivalent? About $9,000. That 2004 Toyota Corolla retained most of its resale value over five years and proved itself to be a much better value than most other cars.
Maintenance and insurance will cost a lot more as well. Just ask anybody who ever bought an old luxury ride. Replacement parts for a 1999 BMW aren’t any cheaper than for a new one.
Obviously these aren’t the only things you should consider when buying a car. But I find that most landlords don’t think nearly enough about the impression their choices make, and this is one way to do so. And considering the amount of time you spend thinking about your major investment decisions, shouldn’t you devote a little more to this important choice?
Talk to Your Tax Advisor
As you know, the domestic automakers are in serious trouble right now, and I expect the government to create some innovative incentives to try to encourage people to buy cars as part of their ongoing bailout efforts. That means we are likely to see tax changes which will affect your purchasing decisions. I used the Auto and Vehicle tables at Small Business Tax & Management and Edmunds.com for research, but you should ask your tax advisor for advice. Your advisor should be up on the latest changes.