Buy a car for cash or get a loan and buy more real estate?

[Heidi Hughes]

Hi BP Community,

Here's a random question.  I have a TDI Diesel car that VW is buying back for approximately $28K.  I am looking for a replacement car.  I was thinking it would be nice to use that cash towards another property! But, I can't do without a car.  Dealers are offering 0-1.5% financing.  Should I do a car loan for the next couple of years and use the 28K to buy another rental property?  I have my own company and write off a portion of my car.  Not usually a fan of car loans or leases but I am tempted with OPM that's so cheap.

Thanks,

Heidi    

[Michael Hastings]

Hi @Heidi Hughes,

You have heard the adage "hindsight is 20/20"?  If I was in your position where I was out from under a car loan and received a lump sum of cash, I would buy a moderately priced automobile and pour the rest of the cash into investing, building my financial future.  Many of the "retire early" gurus swear off Car Loan payments, and I have to tell you, I think they are right (no, I know they are right).  The car is a depreciating asset, and no matter how low the interest is on the loan you use to by the car, the asset will never increase in value.

Take advantage of the cash windfall, get a car that is moderately priced to get you around (6K to 8K) and take the remaining money to continue building your real estate empire.

Like Dave Ramsey says, no one cares what car you drive, except you!

Good luck, I hope my words are helpful.

[Thomas S.]

Buy a inexpensive car with cash. That cheep loan is going to cost you 5K the minute you drive off the lot.

[Francis B.]

I totally agree with Michael and Thomas. Use a portion of your cash to purchase the inexpensive high quality used car (7k-10k). You can use  the remaining money to buy more rentals and/or use a as a down payment for a loan on a rehab project. 

If you walk into a dealer with cash they are willing to negotiate the selling price. There are tons of late model cars under 10k that reliable. Also consider purchasing an one year extended warranty. Not at the dealer but research some of the independent warranty companies. Also there are some cars in this price range still under the manufacture warranty. 

As soon as you drive it off the lot it has depreciated. If you get into a car accident you lose more value. I had a car loan and got into a accident. After that I was upside down by several thousand dollars. To avoid this pay cash and save the money and use it towards investing on some level or getting out debt. 

[Shawn Ackerman]

@Heidi Hughes You seem like you are already investing so not gonna go over the asset vs. liability speak.  I will say however get the cheapest mode of reliable transportation you can find as your not investing in the car.  Whatever you have left, put it into something that is going to produce a solid return.  Now if your a Uber/Lyft driver then obviously that changes things as the vehicle will actually be generating $$.  I'm a big believer in leverage, so if you have that option I'd say take it.  Best of luck to you.

[Ali Boone]

Well normally debt for a car is "bad debt", but at that low of an interest rate...I'd certainly consider it!

The way to decide is to figure out what the % cash-on-cash return on a property would be, and after the mortgage interest % is taken out from that, then take out the % interest on the car loan, and if you're still in the plus...it's a winner! It's all about which way will be profitable.

[Heidi Hughes]

Thanks @Michael Hastings @Thomas S.@Shawn Ackerman

@Shawn Ackerman@Francis B. and @Ali Boone  Advice is greatly appreciated.  I felt like getting a loan wasn't the way to go.....just needed confirmation.  

[Jim D.]

I would echo the advice to buy a quality used car in the 5-10k range and invest the rest of the money.

As a side note, anytime you see lower than 5% interest on consumer products like cars, jewelry, solar panels, whatever... it is always done by the retailer increasing the price and using that money to buy down the interest rate. So you're not actually getting a great rate or great deal--you're paying for it in the purchase price. The supposed "cash discount" is just them not incurring the financing fees to buy the rate down.

Typically costs about 5% extra to buy the rate down to 0% for per year.