Buying a car and a home are significant purchases that one makes in life. However, deciding which to buy first usually involves a dilemma. Some people prefer to buy a house first. Below are 4 reasons as to why this would be the better choice:
- Appreciating vs Depreciating asset
This is one of the main arguments in favor of buying a house. The general principle is that a house is an appreciating asset and a car is an asset that depreciates. When you invest in a home, the value of it increases over time, whereas if you purchase a car, there is a high chance that the value would depreciate when compared to a property.
It is estimated that a car depreciates at an average of 14% for every year you own the car. On the flip side – depending on where it is located – a property appreciates at an average rate of 3% to 4% every year you hold it. While this might not seem like much, keep in mind that a property can also bring you a good percentage of return on investment (ROI) by renting it out.
Therefore, while investing in a house will increase your hard earned money over time, investing in a vehicle will do the exact opposite. It is understandable that in some cases, having a vehicle gives one a sense of freedom and also addresses a practical need. If you’re really interested in purchasing a vehicle and also don’t wish to splurge on your hard earned money, it’s best to go for a second hand, low cost vehicle with low fuel usage. If you’re looking to retain and increase your wealth and assets, investing in a house is the wiser choice.
- Rental Income
In addition to price appreciation, a home can also generate more long term wealth through rental income in comparison to a car. You have the opportunity of providing the house for rent if you are not planning on moving to the new space immediately. When considering the upfront costs to purchase a property, the average return on investment (ROI) is between 7% to 15%, depending on the condition of your property and where it is located.
Taking into consideration how you structure your payment terms for the tenant, you could receive liquid cash every month or year which you could then use to settle a loan (if you have one) or re-invest into another project.
Further, with the use of eye-catching pictures, you would be able to increase awareness during holiday seasons which could then make your house a vacation rental as well, enabling you to gain revenue, as mentioned above. So not only do you have an appreciating asset, you are also able to make a higher amount of wealth from a home for years to come.
- Increase in cash outflow
In terms of additional expenses, when a purchase of a vehicle is made, it is quite obvious that there would be added expenses such as, fuel, insurance, lease payments etc. Due to the addition of these expenses, your purchasing power reduces, meaning you would not be able to indulge as much in recreational or other fun activities.
Similarly, even purchasing a house also increases cash outflow as you would have to pay bills, buy furniture (if needed) etc. This means that purchasing a house would also decrease buying power. Therefore, both investments result in additional costs. However, through the additional revenue gained through renting out your house, it’ll be extremely easy to pay off these extra expenses rather quickly.
While one could argue that even a car could be rented out to cover such expenses, keep in mind that a car still depreciates in value over time. So when the time comes that you wish to sell your vehicle, the price you could get for it would be far lower than what you purchased it for. While with a house, you could sell it, keeping a nice profit margin in a healthy real estate market.
- Alternatives
If you wish to buy a home first and have to compromise on a comfortable mode of transportation, you still have other good options that you could choose for travelling. With new car services coming up everyday, you could make use of apps such as Uber, Pickme and more. And of course, opting to use public transport will also reduce your negative impact on the environment!
However, there are certain factors that can influence this major decision. Two of them being :
- Preferred lifestyle
For some people, living on rent is not a huge issue but they might not prefer the idea of travelling by public transport. So naturally they might choose to purchase a car. On the other hand, for some, the idea of being homeless scares them. People like this would most likely prefer a home over a car.
- Which can you afford?
You should also consider if you are financially able to purchase either of the two. While some people assume they could get a loan to buy either a car or a house, they arrive at the bank and make arrangements only to realize that their financial capacity is quite low and they do not qualify for a loan. You have to carefully check your finances and purchase what suits your current budget and NOT the revenue you hope to earn in the future.
As mentioned above, if you do choose to buy a house first, it would create an additional stream of income when you offer the house for rent. This extra cash could even help you to save / afford a car while also helping you manage the expenses incurred when purchasing the house.
To recap, we would always recommend buying a house over a car. However, there might be instances when the best choice to make depends on the individual’s circumstances.