Rolling in the dough
Ashley and I recently had an interesting conversation with some friends of ours. They were talking about a new car they wanted to buy. And when I say new, I mean brand new. And based off what I could tell, the starting price on this vehicle was going to be close to $35,000. That was the starting price.
As we talked further, our friends let us know that the monthly payment on that vehicle would be around $550 a month. We asked if that amount included insurance, and they said, “No.” So, their total monthly payment, with full-coverage insurance, would be around $850.
With that information I said, “That’s more than a house payment.” They smiled and insinuated that that amount would be a drop in the bucket for us. I asked what gave them that idea and they replied, “Because you have rental properties.”
This is when we got to educate them on the life of a landlord.
You see, people often erroneously think that when landlords buy a house they get to pocket all the rents that come in. If that were the case, it would be great. You could own 10 houses that rent for $850 a month and make $8,500 a month or $102,000 a year. That’s great money, right?
But that’s simply not the case. You see, when a landlord buys a property, they have a mortgage payment to make just like anyone else. But in addition to the mortgage, they must also put aside money each month for the expenses associated with owning a rental property. These include things like taxes and insurance. Landlords also have to prepare for the times the house goes vacant, and they have to save for costly repairs like when the air conditioning goes out or the house needs a new roof.
By the time you account for all those expenses and make the mortgage payment, a landlord hopes to clear $200 a month in positive cashflow. From that standpoint, 10 houses would bring in $2,000 a month.
As we talked about these calculations, our friends realized we don’t bring in the massive amount of money they thought landlords made.
But then, the husband had a realization. He said, “One day, the houses will be paid off. When that happens, you’ll be rolling in the dough.”
We smiled and said, “That’s the idea.”
So what about brand new cars?
That car they’re looking at has a base price of $35,000. (We have literally bought houses for that price.) Now, they plan to make payments on it until it is paid off. Normally that takes six years. But by the time they get it paid off, the value of the vehicle will have dropped dramatically. (I checked kbb.com for a 6-year-old version of the same vehicle. It was worth less than a third of the new price.)
With rental property, however, there’s a high likelihood the house will be worth more than when you purchased it. But more importantly, once it’s paid for, your monthly income will go up dramatically because you no longer must make a mortgage payment.
Now, there’s nothing wrong with buying a new car. And if owning a brand-new car makes you happy, by all means do it. But consider this: if you invest your money into that vehicle, (pun intended) you’re literally rolling in the dough … down the street.
Ashley and I have never had a new car. On average, our vehicles cost about $5,000. We pay cash for them and drive them until the wheels fall off.
We chose to drive cheap, reliable cars and put our money into an investment vehicle that will increase in value and pay us monthly over time. And that is how we roll.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.
Great commentary Joey. For what it’s worth. Ann and I both drive cars that are 10+ years old. I grew up not poor, but one step above – lower middle class as she did. It was an adage in our family to buy used cars. I played football with two brothers that bought and fixed up old cars for sale in their HS years. They have now owned a body shop for 40+ years. My body shop buddy told me, the best value in cars is to buy a 4 year old Japanese model and sell it every two years. Then repeat the process.
That’s interesting. I didn’t know that about Japanese cars. Very cool.