Real estate investors: please pay attention. This blog begins by discussing buying a used car but it soon takes a new direction: real estate.
For years, as I went through many cars ranging from Volkswagen Beatles (so old it had no gas gauge) to Mercedes Benz’s (so long ago I can’t even remember the series), I was mystified. Why do those brand new cars lose hundreds or even thousands of dollars as soon as they are driven off the new car lot?
So what? I can live without that answer because I never buy new cars. But how do you decide how much you want to spend on a used car and what’s worth. And so on.
But I am no longer confused because a friend who buys and sells used autos revealed to me a formula that I plan on using for as long as I buy cars.
His insight: he likes to buy (and finds them easy to sell) cars that cost anywhere from $3,000 to $6,000. This is the lower end of the market. He prefers these cars because he figures that once they are fixed up (he makes sure their records show they have had proper maintenance and no more than usual wear and tear), they can depreciate only about $500 to a high of $1,000 a year. So if you drive them for two to three years and are then ready for something “newer,” you can unload to them without a huge loss.
If you take the lower end of this scale, it is only costing you a reasonable $500 a year for your car (yes, some expenses will come up such as new tires, but since you get a car in good condition, these extras are minimal).
This not only makes sense to me but perhaps is a reminder that economics, the dismal science, is one that has to be among the top considerations (maybe even the top one) in real estate investments.
Intellectually, we know we should not fall in love with cars or homes. But in buying and selling investment real estate, as in cars, numbers are all-important.
And so is a formula for the dismal aspects of your buy.
One number you should never neglect is what you pay for a property and what you propose to unload it for down the road. And of course, there are the numbers of your interest payment and your monthly payments if you are getting a loan. Other numbers include the prices of area properties. And so on.
Believe me, I am not being unpleasant because I am far from the only person reminding you about the economics of owning any type of property (and this is not even to mention the obvious upkeep costs of cutting the grass, property and insurance costs and others).
You almost certainly do not take an extremely close look at what you budget for a car. But you had better do so for a generally far more expensive purchase: property.
So that in a nutshell is how buying cars is similar to purchasing property. Get a formula. And please, don’t fall in love with either one before looking at their economics.