Why Buying a Luxury Car is Smarter than Buying a Luxury Home
Common sense: A home is an asset that appreciates in value and that can be purchased with tax deductable borrowed money. A car on the other hand depreciates quickly. Therefore you should buy the biggest and most expensive house that you can possibly get away with and avoid buying expensive cars. This seems to make sense…unless of course you are a contrarian goldfish.
Contrarian thought: Buy an average house instead and do not become a slave to your mortgage for the rest of your life. Buy a car that you will be happy with for a long time and hold on to it. Now let me explain the contrarian thought process.
Let’s assume you can buy an average two thousand square foot house in a good but not luxurious neighborhood for about $300K. Now let’s assume the luxury home with four thousand square feet in a prestigious neighborhood costs $750K. I think this is fairly representative of most metropolitan areas in the United States. The difference between the average house and the luxury house is $450K.
Now, let’s say you have $100K for down payment and that you would borrow the rest with a 30 year fixed rate mortgage at 6.5%. For the average home you would be making payments of $1,264 a month plus property tax. For the luxury home you would be paying $4,108 plus property tax. The difference is $2, 844 a month! Have you thought about what you could do with this kind of money? How about taking a trip anywhere in the world every month for 30 years? Would owning a luxury home give you more satisfaction than that?
If you have the extra money for the monthly payments, here is a suggestion. Buy the average home with a 15 year loan at 6% (15 year loans usually have slightly lower rates that 30 year loans) and pay $1,687 a month. That way you would be free from mortgage payments in 15 years. Assuming you buy your first house at the age of 25, you would be free by 40. And it still leaves $2,421 per month in your pocket when comparing to the luxury home.
If you have the $450K in cash to pay the difference between the luxury and the average home, how about investing it in a diversified portfolio yielding 10% per year? Even if you account for 3% inflation, you could withdraw about $3K every month from your investment for 30 years!
How about the luxury car? Did you know that you can buy a 3 series BMW for about five thousand dollars more than your average car? And if you account for the fact that it holds a much higher resale value than the average car and that all maintenance expenses are covered by BMW for 4 years, the difference in price is even lower.
But the main point of the argument here is that if you buy an average car that you don’t truly love, you will most likely want to replace it with another new car in a couple of years, which means you will be paying heavily for depreciation. Buying a quality luxury car that you can hold on to for a while in the end is cheaper than buying an average car that you replace every couple of years. And it gives you a higher sense of satisfaction.
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Pingback by The Carnival of Real Estate #74 | Minnesota Investment Property Blog on 21 January 2008:
[…] The Contrarian Goldfish has no concerns about swimming the opposite direction by himself! He argues against the conventional wisdom is his post about Why Buying a Luxury Car is Smarter than Buying a Luxury Home. […]
Comment by Benjamin Bach on 21 January 2008:
Since when is a 3 series a luxury car ? Gimme a s65 and we’ll talk
I recommend friends and clients adhere to the 2 property, 1 car ratio, progress to the 3 property, 2 car ratio. Sure beats the 2 cars 1 property model. These are investment properties, not luxury homes, btw.
BenjaminBach.com
Pingback by Trulia Blog » Carnival of Real Estate on 21 January 2008:
[…] ‘Why Buying a Luxury Car is Smarter than Buying a Luxury Home’ posted by the Contrarian Goldfish […]
Comment by Jennifer Kirby on 22 January 2008:
The last home we bought was the smallest in the neighborhood which let us get a 15 year mortgage, and also save money. Sucking it up and going smaller is the thing to do if you want to get ahead financially. It also let us buy a Honda Odyssey minivan - while not a luxury vehicle, it sure beats driving a Caravan.
Pingback by Carnival of Money, Growth and Happiness #29 | Credit Card Lowdown on 23 January 2008:
[…] presents Why Buying a Luxury Car is Smarter than Buying a Luxury Home posted at Contrarian […]
Comment by PT from Prime Time Money on 27 January 2008:
That’s a fresh way to look at it. I like the idea of a trip every month. Life would be sweet.
Pingback by Cavalcade of Risk #44: Risk Is Everywhere Edition on 30 January 2008:
[…] Why Buying A Luxury Car Is Smarter Than Buying A Luxury Home @ Contrarian Goldfish Contrarian thought: Buy an average house instead and do not become a slave to your mortgage for the rest of your life. Buy a car that you will be happy with for a long time and hold on to it. […]
Pingback by Making homeownership affordable again - Smart Spending on 31 January 2008:
[…] Contrarian Goldfish, who advises that even if you can afford a huge house, choose a modest home and buy a luxury car. Always the contrarian, that Goldfish. “Buying a quality luxury car that you can hold on to for a […]
Comment by Llama Money on 31 January 2008:
I can’t even begin to imagine how absurdly nice a $750k home would be in San Antonio. I’m not sure these prices fit in quite everywhere
But I do like the concept of buying way less home than you can afford. It’s a good one, even if the numbers don’t jive everywhere.
Pingback by Carnival of Real Estate on 2 June 2008:
[…] ‘Why Buying a Luxury Car is Smarter than Buying a Luxury Home’ posted by the Contrarian Goldfish […]
Comment by shhh on 23 November 2008:
I agree with you money. Houses are really out of many people stratosphere when you think about it. I like autos and limos in particular. I am thinking about refurbishing an old rolls royce stretch limo to make it look like the phantom. My only problem is looking like a millionaire in a modest neighborhood. Especially when you consider i’d be getting cheffeaured around.