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Pay cash for a car or get a loan (case study with my Ferrari)

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biophase

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I just bought an R8 last month and I actually got a loan to pay for the car. Yes, blasphemy! Getting a loan for a car? I guess that means you could not afford it!

Well, I did the math and here is why I got a loan.

In 2011 I paid cash for a Ferrari 360. Looking back, I wish I had gotten a loan instead. You see, back in 2011 I was debating between purchasing an investment property or getting my dream car. Ultimately, the dream car won. But in hindsight, this is what I wished I had done.

I wished I would have bought the property cash and taken out a loan on the car

In 2011, we were in a real estate downturn and properties were selling at very low prices. The condo that I had my eye on was an $80,000 short sale that required all cash to buy. In fact, there were 3 of these condos available. The Ferrari was also $80,000.

If I purchased the condo for cash, it would have cashflowed $500/mo. If I would have gotten a $80,000 car loan, my car payments would have been $1500/mo. So the whole thing together would have been -$1000/mo. Obviously, if I couldn't swing that, I have no business buying a Ferrari.

In 2013 I sold my Ferrari for $65,000. So it cost me $15,000 in 2 years. My car's net for this period was -$15,000. (I have left out maintenance, insurance, etc... because they are irrelevant. It would have been the same if I went with a loan or paid cash)

If I would have bought the condo and the Ferrari, this is how 2013 would have ended up.

The Ferrari would have cost:

$15,000 (sales price difference)
$36,000 in payments
-$30,000 in loan pay down
----------------
$21,000 in total costs

The condo would have produced:
$12,000 total cash flow
$35,000 in appreciation
----------------
$47,000 in income

In this scenario, I would have made $26,000 and had a Ferrari for 2 years! But instead, I was -$15,000 after 2 years. Ok, but what if the condo does not appreciate? Then I would be at -$9,000 after 2 years. I still would have been ahead.

Earlier this year I had the same nagging decision, R8 or condo

This time I went ahead and did both. Let's look at R8 numbers.

I actually bought one of the same condos that I was looking at in 2011, but I paid $122,000 for it. It has been rented out at $900/mo, cashflowing $600/mo. I put down $20,000 and got a $60,000 loan on my R8 at 3.3%. I have paid $142,000 out of pocket.

My return on the condo is 5.9% and my interest rate is 3.34%.

So if I keep my R8 for 2 years this is what the numbers would end up as:

$X (sales price difference)
$26,000 in payments
-$22,800 in loan pay down
----------------
$3,200 + X in total costs

The condo would have gained:
$14,400 total cash flow
$0 in appreciation
----------------
$14,400 in income

$3,200 + X = $14,400
X = $11,200

This means that if I can sell the R8 in two years for $68,800 I would have broken even assuming no appreciation in the condo. Hooray for car loans!
 
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MoneyDoc

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Great post, have this copy & pasted for the near future.
 

Kingmaker

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I just bought an R8 last month
m9IvH1Z.png


It's available :smoking:
 

TG_Hawk

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Ahhh the power of leverage. Gotta love it.

This reminds me of a philosophy I read in one of Kiyosaki's books that really resonated with me. He said for every toy/liability (car, boat, jet ski, etc.) he wants to buy, he must first buy an income producing asset that will pay for that liability. So not only will he own his toy for little to nothing, but when it's payed off or he sells it, he still has an asset that pays him forever.
 

early riser

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Interesting that you broke it down, but not the first case.

I've sold luxury vehicles in the past and some of my most prestigious clients viewed taking loans out the same way.
Their money was earning more elsewhere (assuming the most likely scenario that the condo doesn't depreciate), higher than the interest rate, so they took a loan.

Tons of them bought used too, and let someone else take the initial major depreciation hit.
(which based on what you paid for the R8 seems to be the case as well)

I like the way you broke it down as well...not can I afford X a month, but I can afford to purchase this car outright, however would it make more sense to pay X a month and have the rest available in liquidity.
 

biophase

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Would leasing have been a viable option too or purely finance?

I guess leasing would work to. You would basically know all your numbers ahead of time because you know all the payments and length of the lease.
 

SteveO

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Or better yet, spend your money on something besides speedy expensive cars. :cool:

Other than that, you have a very valid analysis.
 

MJ DeMarco

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SteveO

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We spend money on things we love. :cool:
Of course we do. My post was simply intended as a joke. I spend money on things that others would certainly not appreciate.

This forum is built on the analogy between cars and money. It is apparent from many posts how much people love fast sports cars.

But, I don't get the car thing myself.

I once went to a dealership with the intent of purchasing a nice BMW. Could not get myself to do it and ended up buying a Honda Accord with a V6. It seemed to be all that I desired at the time.
 

jretana96

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Great! A perfect example of good debt! Importante of financial education!

Enviado desde mi SM-N910C mediante Tapatalk
 

SteveO

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SteveO, I am open to suggestions on what else to spend my money on! :)

At what point will you be buying your personal jet or your jet service? ;)

I was just talking today about how nice it would be to have a motorhome or condo at the beach.
 

D11FYY

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Ahhh the power of leverage. Gotta love it.

This reminds me of a philosophy I read in one of Kiyosaki's books that really resonated with me. He said for every toy/liability (car, boat, jet ski, etc.) he wants to buy, he must first buy an income producing asset that will pay for that liability. So not only will he own his toy for little to nothing, but when it's payed off or he sells it, he still has an asset that pays him forever.
Yeah I saw this also on one of his youtube videos it shows him buying (I think a yellow Lamborghini) but he says I have invested in an asset which has really bought this car for me. So it does make sense.
Same as myself my next investment is a Rental Property instead of the new Audi S3, ... Simple Math S3 = £30k , Rental Property £30k , s3 looses £500 consistently a month , property gains £400 per month. Some income whilst I sleep, now thats a nice thought.

btw Bio congrats on the R8 its a lovely car!
 

RBefort

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Isn't the golden rule to always pay off the debt if the money you're spending (the interest rate) is higher than the amount you're gaining by an investment (saving accts, whatever else) and vice versa? I'd definitely just take out a car loan for 3% if I was going to swing 5-10% off an investment. Thanks for laying it all out!
 

Shaun_Pro

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Kuddos to you bro! This was a definite eye opener as I read this over the weekend with my girlfriend and it was a great read. Keep dropping those gems for us. Thanks
 

Vigilante

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My gut reaction was the opposite, until I read your analysis and it makes perfect sense. The difference lies in the discipline to be smart with the savings.
 

MJ DeMarco

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I tend to evaluate things now in terms of three measurements

1) Time
2) Money

and

3) Drama.

For me, owning another rental property scores high on the drama scale, as does owning another fast car that attracts attention, not to mention maintenance cost/time, higher insurance, more bills to pay, etc. Of course, such tolerance for drama is always in flux. Right now drama cost exceeds the desire to own.
 
G

GuestUser140

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I tend to evaluate things now in terms of three measurements

1) Time
2) Money

and

3) Drama.

For me, owning another rental property scores high on the drama scale, as does owning another fast car that attracts attention, not to mention maintenance cost/time, higher insurance, more bills to pay, etc. Of course, such tolerance for drama is always in flux. Right now drama cost exceeds the desire to own.


So in your view, would renting a fast car for a weekend when you'd like to, paid for by passive financial instruments rather than real estate, be the better option?
 

ZCP

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@MJ DeMarco over the hill? ...... 'Get off my lawn you crazy kids!!'
 

safff

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Just to update this thread. The condo I bought for $122k is now selling for around $142k. So it turned out to be a good choice. The R8 on the other hand just had a $2300 repair. :(

I had the opposite luck! Toyed with buying a Ferrari 360 for 35k GBP a few years back, kept my apartment that I had leased. Sold the apartment for the same that it was worth back then.. Whereas the same ferrari now costs approximately 55k gbp!

I guess in reality the property paid for irself whereas the ferrari would have involved emptying my bank account so it's not quite the same senario
 
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townhaus

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Hindsight is 20/20.

If you believe you can generate higher returns by investing the cash than the interest rates offered, then it's logical to take the loan rather than paying cash for anything.

Property is like any other market & the best strategy is to trade it i.e 'flipping' (rather than investing for rent income) in my opinion. I wouldn't assume it's always going to go up.
 

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