Issue #20 - You take the loser cruiser? You must be a loser!

Read time: 3 minutes

Hola amigos! Buenos dias. Gracias a ustedes por leer, estoy muy agradecida de tener les aqui. 

Yes, I like to practice Spanish. Translation:

Thank you fine people for reading, I'm very grateful to have you here.

Please forward to friends, family, and colleagues to subscribe.

Today I'm going after one of the worst financial decisions people make: buying expensive cars. 

Sorry in advance. 

1. Personal Finance

"You take the loser cruiser (bus)?!"

"Yes"

"Then you're a loser!"

"Actually you're a loser because you just took out a fat loan to buy a DEPRECIATING asset against ALL INVESTMENT ADVICE EVER TAUGHT"

The problem with western society:

• Cars are perceived as status symbols.
• Even though you go broke pretending to be rich.
• What they really signal is insecurity instead of true success.
• That, and a complete breakdown of financial education we are teaching people.

I hear so many people quote their lease or finance payment, “oh it's $700/month”… and the common response? "Jimmy, buddy, that's pretty good man!"

Instead of that, it should be "Jimmy, you bonehead, what the hell are you doing paying $700 monthly for a car that sits parked for 23 hours a day?"

For people that are struggling to save and invest, think twice about your car situation. Best to opt for a cheap, used car and drive it for many years.

There is no math that proves the $100,000 Range Rover is a financially sound decision. Maybe it’ll give your ego a boost, but that’s hard to take to the bank.

How I think about a car purchase

Now, my wife and I have had one car since we met. It's a Mazda CX-5, a solid 5-seater with good trunk volume for our needs.

It's worked out great, and we've saved a ton of money. Money that would have otherwise been spent on a second car has been available for other spending and investing purposes.

But with a 6 month old baby, and a bit of commuting for work, we are toying with the idea of a second car.

Through this thought process, I've been doing some mental math.

Let's say car insurance is $150/month, gas is $200/month, and general maintenance/oil changes about $100/month.

Total cash costs = $450/month.

Average Uber ride I've been taking lately = $20.

$450 ÷ $20 = 22 → the monthly cash costs of a car are equivalent to 22 Ubers.

So each month we don't have a second car, in a very real sense we've earned 22 rides with an on-demand Chauffer.

And the most Uber trips I've taken in a month are less than 10. The rest is public transit (yes, I know, I'm a loser).

Don't steal from yourself

Not to mention avoiding over $80,000 after tax to get that brand new leather trim Tundra with Apple Car Play.

Know what $80,000 invested at 8% for 25 years is? Half a Million dollars.

You are literally stealing over $500,000 from your future life.

Get a used car for $10,000-$15,000 and invest the rest. Get to your destination at the same speed.

Yes, a used car will have more maintenance issues, but there are plenty of 100,000km cars out there that will last until 200,000km even 300,000km.

If you absolutely must buy a new car, make sure you run it into the ground until it explodes in 30 years.

Parting words

So, anyway, while we have one car and enjoy the savings, we are looking on Auto Trader at second car options in the $8,000-$12,000 range – and there are a ton of great choices.

By the way, I spent some time with my cousins that live in London last week.

There, public transit - the "tube" - is the norm; owning a car is rare.

No loser cruisers there.

2. Stock Markets

This email is already too long, so, a poem....

Stocks go up, stocks go down 

Buy them early, buy them often

You'll be happy, yes you will

Cuz your portfolio will be awesome

3. Real Estate

Last week I discussed how an expensive commercial real estate transaction can all of a sudden look attractive if there is assumable financing. 

A reader followed up with a great question:

How do you handle the refinancing risk when that assumable 2.5% mortgage matures in 3-4 years?

My response: 

I wish there was a 'secret sauce' to predicting forward interest rates. But there isn't.

So the best practice - at least in our opinion - is to assume today's interest rate is the same in 4 years. 

So in the valuation model I would assume today's market financing rate of ~6% is the prevailing rate in 4 years, not the assumable 2.5% interest rate.

With the rate set, you can use Debt Service Coverage to inform your Loan to Value proceeds .

Assuming your rent roll is decent and you own quality real estate, you can arrive at a fairly conservative mortgage amount in the future.

Again, predicting rates into the future is a tough job. So we start with today and use the same for tomorrow. 

Just the same as when we buy an asset and cap rate, we assume to sell it at the same cap rate. Unless there is a real and defendable increase in the profile of the real estate i.e. high grading the tenant mix, increasing the WALT, adding new leasable area, etc.

I sometimes see other General Partner's pitch decks with a 4 year refinancing rate several bps LOWER than today's rate AND they use a much lower exit cap rate which obviously inflates the value and the only reason they explain is they "expect interest rates to decline".

That is called a hope trade. Make sure you're not involved in those.

Or if you are, be sure to know that you are.

1 Quote

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so."

– Mark Twain

A Question

What motivates you?

For me, in a word: family.

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Thank you

Eddie Gudewill, CFA
 

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