 What’s the cost of freedom? Want to travel worry free, take a month off here and there in a year and not think about needing to be at a job to cover all your payments all the time? What if the job market is a little shaky and you’re worried you might have your hours cut? Last week in the same day I talked to two people their cars.
One a middle manger, she was car shopping & looking to trade in her soft top corvette for something a little better for the winter, as it’s usually winter 8 months of the year where I live. She was shopping the soft top around only to realise she had negative equity in the car, basically she owes more money on the car then the car is worth. She was however excited about the idea that the dealership was willing to take her car on trade then roll her negative equity over onto the new car. She then proceeded to talk about what kind of “deal” she was being offered on her next purchase. I walked out very confused by her excitement. Basically this lady is taking bad debt and rolling it over onto bad debt only to start the cycle over again. Ahh unless my math is wrong here, she will be forever making car payments on vehicles where the difference on what is owed and what it’s worth are getting further and further apart. About four hours later I’m showing a basement suite I am looking to rent. The suite is priced extremely competitive and usually attracts young couples or short term workers who live out of the city. A couple pulls up, they are in there late 30’s, the lady in nurses work clothes. A job she explains “they love her”, thou she’d recently had her hours cut back. Him in jeans and a t-shirt looking over tired or slightly intoxicated asks to use the toilet, it seemed urgent. They had rolled up in a one year old, black mustang GT. 5.0 litre with a six speed transmission. I know the cars stats because he was telling me as thou it was leaving a positive impression on me. He continues to tell me about there situation. Apparently he had “asked for a temporary layoff” so unemployment insurance would pay for him to get a truck driving licence and get him back into the work force. I don’t know exactly how unemployment insurance works; I’ve never tried to apply. Thou in three months he hadn’t started any training. From there he goes on about how they’d like to move in asap and make payments on the rent and d.d. as they can’t afford it all at once and are now LIVING IN THE FREAKIN CAR! I’m all one for helping people out and can sympathise with a job loss, I’ve put myself out of work before. However I feel like both of these people had blatantly made terrible choices to portray something there not, wealthy or wise. I’ve made my fair share of bad choices and even bought a car of a dealership with a credit card once. This lead me to my present dilemma; my nephew is looking to buy a new vehicle and I’m trying to talk him out of it as I know what stupid decisions look like (I’ve made lots) and will try to steer others away from them. So I ran some numbers to possibly help anyone deciding between a first major vehicle purchase or a first home purchase decide what the long term costs really are and some of the financial facts. I choose The Go Auto Loan Calculator https://www.goauto.ca/financing/loan-calculator/ as it was pretty easy and clear. With a used car the default interest was 6.99%. On a high, $40K, middle $20K and low end $10K used car your payments and interest will look like this. $40,000 @ 6.99% @ $0 down payment. Plus %5 GST. 72monthly payments = $716/month and $9552 interest paid! $20,000 same details = $358/month and $4766 interest paid! $10,000 same details = $178/month $2388 interest paid! On a new car you could get 0% financing. The depreciation of a new car is %15-%25/ year or about %65 after 5 years. However the particular dealership I contacted was extending this deal to 84months. So your vehicle would be 7years old once paid off and lost over %75 of it’s value. New lower end dodge 1500 is about $60,000 @ no down payment 0% financing plus %5 gst for 60months (5years) = $1050/month and about a $39,000 loss in value! Now it’s worth about $24,000 (7years)= $750/month and about a $45,000 loss. Worth about $15,000 $40,000 vehicle 0% down, %0 interest, plus %5 gst for 60 months. (5years) = $700/month and about a $26,000 loss. Worth about $14,000. (7years) = $500/month and about a $30,000 loss. Worth about $10,000 Lets say you put down %5 like you would on a house. %5 down on $60,000 dodge = $3,000 down. = $1000/month payments thou doesn’t really matter as your not paying interest. Ok that was fun now lets do first time buyers house. Lets say the house is worth $200,000, basically your buying a condo or found a smoking deal on a duplex where I live. I’ll use the Mortgage Intelligence link to do this one http://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html Lets say you get a rate of 3.99%, a little high right now thou acceptable to make a fair argument. $200,000 with %5 down = $10,000 or $190,000 borrowing. $190,000 @ 3.99% = monthly payments of about $1000 over 25 years. If you never re-mortgaged and paid this amount forever (you never will) you’d pay over $100,000 in interest on the term of that loan. What $100,000 in interest! That’s not an accurate figure thou lets say you never make a single payment on that mortgage, then who cares what it is. Wait where do I even get $10K, I only have like $1500 in the bank. Glad you asked. If you want to save it yourself then you’ll need a plan and the same job for a year or two. $10,000 / one year = $833/ month to save or less the payments on brand new dodge pick up for a year. Over two years $416/ month or slightly more then the payments on the $20,000 car over a year. Have a hard time not spending that dough? Set up your bank account to automatically withdrawal the amount into a one or two year non withdraw able account for that period of time. You’d at least be earning a small amount of interest on it over that time, then losing interest. Or give it to a parent or someone you trust. Don’t want to wait that long? Maybe you are a touch more ambitious or clever. You could also buy that house for zero money down. What ZERO MONEY DOWN? That’s not possible! Talk to someone who is in the business of buying houses. For one they will likely know what to look for in a home and where to go for some good deals & likely save you from any potential problems as they have been down this road many times before. Find a good enough deal and I’ll bet they’ll give you the down payment for a steak in the property. Maybe they put up the down payment and you go 50 / 50 on the place. When you renew the mortgage or the property sells, they get the down payment back and you split the difference. “But I’m just a punk kid who’s ambitious thou I don’t have anything to offer to this wise property investor.” Actually you are in a once in a lifetime spot to qualify for a mortgage for less then if you ever want to do it again. Likely %0-%10 down, usually it’s %5. After this you’ll likely need %20 down to get another mortgage in the future. You also likely qualify for a “gift” down payment. Meaning that a parent or sibling can give you the money as a gift. Or maybe your investor gives it to your parent and the parent gives it to you. Next any landlord is always looking for exceptionally great tenants. What a better tenant to go 50 / 50 with then one who has an interest in keeping the house in good condition. Another option might be that your potential partner doesn’t have time to go around looking for the next deal, thou they sure like a good deal. Chances are you’ve got the time & I’ve never met a property investor who wasn’t looking to buy their next place that someone else has found at a discount that they can buy with less money down. This works in a number of different scenarios, I’ve done it. So have many, many, many other people. You’ll just need to be clever and ask some questions of those who have also done it. Wait, wait, wait… So what if I loose my job and can’t afford to pay for the house? Then I lose the place, go bankrupt and my life is basically over! All is not lost my friend, you can mitigate your risk, help others and help yourself all at the same time. Maybe you never make a payment on the place. Rent out some space! Lets say you have a five bedroom place you bought for $200,000. Your mortgage is $500 every two weeks or $1000/ month Insurance $163/ month Water, sewage, garbage $100/ month Natural gas $130/ month Electricity $70/ month Cable TV $50/ month Internet $80/month Average repairs in a year $75/month Total monthly bills $1668 or the same as the payments, insurance, gas on the new pick up truck. What, how am I going to afford that! You have 5 rooms. Lets say you rent out a room to four friends for $450/month including everything. This is an extremely good deal, they aren’t going anywhere. Total $1800! Now your actually living rent free and getting paid! Ok, maybe 5ppl in one space is too much. You put a lock on the basement and put in a few appliances then rent it out for say $1000/month and have one roommate for $500/month. Total $1500 or $168/month for you to own that home. In five years that new truck you wanted to buy for $60,000 is worth less then half of that and you’ll likely want a new one to impress your work buddies. In that same five years your house is worth $240,000 and you’ve been living rent free in it. You could potentially take say $25,000 in equity out of it and buy a used or lower end new car with that money and let the tenants keep making your payments. This is crazy talk and can’t be possible. Those are the average bills from the 5 bedroom $200,000 home I bought five years ago. I could however more likely relate then handout figures and facts, at 19 I was drunk for a full year across some of the fun-est beaches and bars in Asia, Australia and New Zealand. It was likely the greatest time of my life. Two years later I meet a girlfriend of my same age, she already owned her first home & could hold her own partying. Today she is presently considerably wealthier then me. Perhaps investing while partying your ass off is the more lateral move. Party on investor, party on…
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