Which to Buy First: The Investment or The Toy?

The other day, someone who listens to my radio show emailed me and asked me to comment on a situation that they were going through with a friend. This situation shaped up to be this:

• -The listener’s friend was recently promoted, and his new position came with a raise to $100,000 a year. Riding high from this new level of earned income, the friend wants to go out and buy a $160,000 Mercedes Benz. The listener, however, wants his friend to buy some rent property first. The friend isn’t receptive. So, could I give some insight on their situation?

It just so happens that I do have some insights on this as a car person and as a real estate investor.

First, it's concerning that a person would go buy a car that costs more than what they earn in a year. The average American is conditioned to buy their toys first and their investments later, and that is the entire problem. People are told that their life’s goal is the car. People are told that the goal is to buy that expensive house, the expensive furniture, the clothes, the jewelry and any other toy that brings them pleasure. Not surprisingly, that's what they do.

In my experience, I have found that no one told these same people that toys are not the goal. The first priority goal is actually passive income. With the passive income you can easily buy the cars, the houses, the clothes, the jewelry and so on. What this gentleman should do is follow his friend’s advice and spend that money on rental real estate first.

Let's switch over to Ferrari for a Moment, I did mention that I was a car person and it just so happens that my favorite toys are made by Ferrari. Now, like this person I did have a goal to own my own Ferrari when I could afford it but unlike him, I never had to worry about making payments on my toy.

Instead of taking the $300,000 and leveraging myself into a Ferrari, I took that money and bought 15 rent houses. It's that simple. 15 homes brought in, on average, $400 per month, each. Let’s do some quick math:

15 homes X $400/month = $6,000/month NET cashflow

That Ferrari cost, including insurance, gas, and maintenance, about 4,000 a month. Now I had a Ferrari, 15 cash flowing houses and $2,000/month spending money to travel, romance my wife, or to just spend on driving around town. Do you think that this friend could do that math on a Mercedes Benz and do the exact same thing?

Currently, this friend is thinking of taking the money out of their earned income. They probably looked in the mirror and asked, how can I afford this? This is the perfect question but looking for the answer in their earned income is wrong. You don't look to your earned income for toys. It's your second stream of income that pays for your toys.

It is ludicrous to go buy toys first. It's taking all of your investment capital away. Toys are a status symbol. They are for fun; they are for the ego. So, I told my listener, and now you, please hug your friend for being human, but if they head over to the Mercedes dealership before buying some rent properties, turn that hug into a tackle and don’t let go until they see reason.