Car Education

August 30, 2019

 

Most people aren’t ‘car people,’ meaning that they don’t have much interest in what they’re driving.  For these folks, the goal is to get from A to B in an efficient and safe manner.  According to AAA, the average American spends around 51 minutes driving each day, going more than 220 miles per week[1].  This comes out to an average of about 11,500 miles per year.  With so much time spent behind the wheel, it’s surprising to me (Darin) that many people don’t care what they’re spending their time in. Why are the roads packed with Toyotas and Buicks?  Although there are plenty of logical answers, I’ll play devil’s advocate and say it’s probably because they don’t know what they’re missing out on.

 

Regarding our financial planning outlook, we often talk about how there are qualitative factors that deserve serious consideration when making a purchase.  When it comes to taking on a car payment, there are obviously opportunity costs.  Sure, you can afford the monthly payments, but maybe that means you won’t be able to pay down your mortgage faster.  If you’re ok with that, great! Let’s talk about cars.

 

Before this gets going, I need to provide you with some background on my automotive history.  I’ve been passionate about cars for my entire life, and it runs in the family.  My close relatives have owned ’67 Shelby GT-500’s, an AC Cobra, multiple Trans Ams, Mustangs and Camaros…  The list goes on and on. Needless to say, I’ve been around horsepower and racing as long as I can remember.  I also drive a lot more than the average person described in the first paragraph – about 300% more to be exact.  But regardless of whether you drive 10,000 miles a year or five times that, I firmly believe that doing so in a nice car is a game-changer.  With that out of the way, allow me to impart some tips and tricks that I’ve learned over the years that will enable you to get a nice car and save money in the process.

 

Most people see a Mercedes or BMW and think it’s more expensive than it actually is due to the perception of the brand.  So, rather than looking at buying one, they’ll go get a new Toyota for $35,000.  Well, I’m here to tell you they could have gotten an outstanding car from either of the German automakers mentioned above for a lot less money than that Toyota, and it would have been superior in every way.  The reality is you can go buy a 6-year-old S class Mercedes, which is the most luxurious car they offer, for less than $30,000.  To give some perspective, this car cost $120,000 or more in 2013.  The problem is people tend to think they can’t afford it, but most of the time they could be driving a much nicer car than they realize.  If you’re thinking those cars have high mileage, think again: many had less than 50,000 miles on them, meaning they were hardly driven!  Don’t worry about the technology being old, either.  One of the reasons these cars cost as much as a small house when they were new is because they featured the latest cutting-edge technology at that time, which means even at 6-year-old it has more tech than the brand-new Toyota.

 

If you prefer something newer, the best way to avoid taking a big hit on depreciation is to buy a car that’s one or two years old.  It’s common for cars to lose 20-30% of their value after just one year.  After that depreciation starts to level out for a little bit, and so the cost of ownership drops significantly.  The second sharp drop tends to happen around the 4-year mark.  The F-150, for example, loses about 15% of its value from year three to year four.[2]  In addition to this second big depreciation hit, after three years many cars run out of factory warranty and might have larger maintenance expenses on the horizon (such as brakes or tires, depending on the mileage of the car).  Now this is not a hard and fast rule because depreciation differs from car to car, but you can save a lot of money by getting a 1-year old car and selling it just before the next big drop in value.  In order to get an idea of when that next drop will occur, look for the car you want to buy and track its prices from brand new to five or six years old.  It’s important that you get the ‘average’ price of the car at each year, in order to make an accurate comparison.  This can be done by looking at the mileage of the cars for sale and comparing it to the typical mileage people drive.  In other words, an average 3-year-old car should have around 30,000 miles on it.  After that, comparing the price decreases from year-to-year will provide a rough idea of what that particular model’s depreciation schedule looks like.

 

Another way to get a fantastic car for cheap (relative to paying full price) is to buy the previous model when a new model comes out.  Take the Corvette, for example.  Chevrolet recently released the design for their new mid-engine C8 model Corvette and began taking orders.  This provides a great opportunity for those who don’t mind buying the previous C7 Stingray Corvette, which will drop significantly in price because everyone wants to buy the new one.  By this time next summer, you’ll be able to find gorgeous Stingrays with very low mileage for great prices.  This tactic is most effective when there’s a lot of interest in the new model being released; generally speaking, if it’s just a minor update to the current model you won’t see as big of a change in price.

 

A word of caution to those of you who just got excited to find out they could afford an awesome car – make sure to check the maintenance history, especially on sports cars.  It’s best if the car has a completely clean Carfax showing all of its scheduled maintenance, but that doesn’t always happen.  There are still plenty of people that change their own oil, which means those cars won’t have any record of receiving an oil change.  There’s nothing wrong with this, but make sure to contact a 3rd party mechanic and have them inspect the car prior to purchase.  Even if the car is at a dealership and they say it’s already been inspected by their mechanics, it’s a great idea to get a 3rd party to take a look before pulling the trigger.  On a side note, be wary of scammers when buying from independent sellers. If you’ve been looking for a car and suddenly find one that’s $10,000 less than anything else you’ve seen so far, use caution.  As the old saying goes, if it seems too good to be true, it probably is.  Never send money or personal information prior to meeting with the owner and having the car inspected.

 

Buying a brand-new car is an entirely different experience all together.  Generally, I wouldn’t recommend it based on the aforementioned depreciation, but there are exceptions.  If your dream car comes out and you know it’s something you’ll have for the rest of your life, then go right ahead and order one.  Buying new allows you to customize the car exactly the way you want it, and if you’re looking at stuff like Aston Martin or McLaren, the level of customization is limited only by your imagination.  However, if it’s a new car from Ford, for example, your customization options from the factory aren’t going to be as extensive.  They probably offer a couple of different colors of leather and some different paint colors for the exterior, but there’s usually not much other than that.  Either way, building a car that’s entirely yours is an awesome experience, just know that you’ll take a depreciation hit if you sell it.

 

There are also ways to save money on that brand-new dream car you want.  As mentioned earlier, when a new model comes out the old model drops in price.  Dealerships tend to offer great discounts on brand new cars in order to get them off the lots before the new model arrives.  Using the example from before, GM is now offering $9,000 off any new C7 Stingray, which is a fantastic discount.  So, if the car of your dreams comes out and you don’t mind waiting a few years to get it, the best time to buy is right before it’s about to be replaced.  Plus, that gives you more time to save up!

 

So far we’ve discussed buying used and new cars, but what if you need multiple cars and don’t have the cash for both?  Well, in the past couple years' automakers have started something called car subscription programs.  They work like a lease in that you pay a monthly fee, but rather than being stuck with one car you get the option to come back and exchange your sedan for an SUV.  These types of plans are being offered by Cadillac, BMW, Volvo, Jeep, Porsche, Lexus, and more, as well as other companies like Mobiliti, Flexdrive, Fair, and others.  Prices can range anywhere from $105 to $4,000 a month depending on the company and level of vehicles you choose.  Some of them allow unlimited trades whenever you want and give you the ability to schedule concierge pickups and drop-offs.  A major downside to many of these plans is they are limited to specific areas.  Audi Select, for example, launched its pilot program only in the Dallas-Fort Worth area, while other programs may only be available in L.A. and the Bay Area, or are restricted to a handful of states.  The subscriptions also have wide variations in-vehicle use; for instance, Porsche Passport allows you to drive an unlimited number of miles for the vehicles included in the plan, and every car you get will be the current model year.  Fair’s program, however, is limited to 10,000 miles/year and will give you vehicles less than 6 years old with less than 70k miles on them.  There are tons of other variations, so I won’t discuss them all here, but if you’d like to know more details about these plans check out the “Complete Guide to Car Subscriptions” article on Autoblogs’ website.[3]

 

The last topic I’ll cover is buying cars as an investment.  Don’t get me wrong, 99% of cars will drop in value, but there are a few opportunities to sell cars for a profit.  Most of these opportunities are with cars selling for over $500,000.  History has shown that rare Ferraris and Porsches tend to see the highest returns, but there are opportunities from lesser automakers like Ford as well.  The major difference is that it will take much, much longer for a rare Ford to appreciate (and it may not), whereas the Ferrari could see a great return in just a few years.  A great example is the 2017 Ferrari F12 TDF.  Only 799 were made, with a starting price of $550,000.  Right now, used examples are selling for around $1.2 million. That’s a 118.2% return.  Want another example?  The LaFerrari cost $1.5 million new in 2014.  Used examples are selling for $3 million and up – a 100% return.  The barrier to entry here is obviously the required capital needed to make the initial investment, as well as the ability to simply buy the car when it comes out.  With models like these, Ferrari will often hand-pick who gets a build slot for their new car. Usually, they pick from a list of loyal Ferrari enthusiasts who have been with their brand for years.  There are other companies (such as McLaren or Aston Martin) that are much more open to letting anyone who has the money buy their new rare cars, but those cars may not initially see as high of a return.  There are also opportunities for investment when it comes to classic Camaros, Mustangs, and others, but the buying and selling trends of that market are less predictable than the exotics mentioned above.  There are also opportunities in doing restorations, but you shouldn’t expect the same kinds of returns as the Ferraris above.  Nevertheless, if you’re interested in diversifying your portfolio and have the ability to acquire cars of this caliber, these strategies might be an option for you.

 

The best part about the buying concepts discussed so far is that they can apply to every level of car.  Whether you want one that’s $10,000 or $100,000, these tools can be used to save money.  Now, what you choose to get at your price point is a personal choice, but it’s undeniable that some cars are simply better to drive than others.  I’ll take that used BMW over the new Kia almost every time not because I need a status symbol, but because it was the best possible car for the money.  But hey, at the end of the day, everyone makes their own decisions!  I’m just here to tell you what those options are.  If you’re in the market for a car and want to maximize the potential of your dollar, feel free to reach out to me for suggestions!  As an enthusiast, I’m always happy to share my two cents.

 

Sincerely,

 

LBW

 

 

 

[1] https://newsroom.aaa.com/2019/02/think-youre-in-your-car-more-youre-right-americans-spend-70-billion-hours-behind-the-wheel/

 

[2] https://www.edmunds.com/car-buying/drive-a-nearly-new-car-for-almost-free.html

 

[3] https://www.autoblog.com/car-subscription-services/

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