What if there was another way to buying a car? What if it didn’t involve ‘buying’ a car at all?
I just came across a quote by J.Paul Getty: “If it appreciates, buy it. If it depreciates, lease it.”
But what does this mean, and how does this apply when it comes to acquiring your next car?
An asset is anything that appreciates in value and/or provides an income e.g. property.
A liability is anything that depreciates in value and/or takes money from you e.g. cars.
Rather than spending money to buy a liability, use that money to buy an asset instead.
Then, use the income generated from that asset to lease/rent your liabilities instead.
In this article, I talk about the traditional way of buying cars, and why it may not be the best.
I then talk about alternative ways that you can procure a vehicle or any liability using assets.
Finally, I share my thoughts on this and whether it is worth going through all this effort.
What’s wrong with just buying a car?
As you know, there are many ways to finance a vehicle, which I wrote about a while ago.
There is Hire Purchase, Personal Contract Purchase (PCP), Leasing, Personal Loans, and Cash.
In my article I concluded that the best way of procuring your next car is by simply buying it.
That way there’s no monthly expenses, no interest, and no restrictions on what you can do.
However, after reading more into this, there is a fundamental issue with simply buying a car.
First of all, a car is not an asset, it’s a liability i.e. it won’t appreciate over time but depreciate.
This means that if you bought a car today for say £30k in 3 years’ time it might be worth £10k.
So why spend that amount of money on something that’ll dramatically lose value over time.
Ideally you want to spend that amount of money on something that’ll be worth more in time.
So then how do I purchase a car but without it losing value? By buying an asset instead.
Buy an Asset to Lease a Liability
The goal is this: use the money to buy an asset instead and pay for the liability using the profit.
Let’s give an example: you have saved £30k or released equity from your home for a new car.
Rather than spending the money on the car, you use the money to purchase an asset instead.
This asset could be a business, property, stocks, etc. For this example, let’s go with property.
Not just any property, but an investment property; one that you would rent out to tenants.
So then you use that £30k as a deposit, and then take out a mortgage to pay for the rest.
After you purchase the house, you then rent it out as serviced accommodation e.g. Airbnb.
Taking the income minus the mortgage, let’s say you’re left with a net profit of £500 a month.
Then you simply lease the car that you want using the cash flow from the rental property.
In this way, you’ve used the £30k to purchase an asset which in turn pays for your liability.
The Pros and Cons of this Strategy
Let’s look at the positives of using your money to buy an asset and then renting a liability.
The asset would give you positive cash flow every month that would pay for your car lease.
Not only that, but the money you put into the property doesn’t disappear, it’s now equity.
That means in say 3 years’ time when you want to renew your car, you could remortgage.
Assuming your property has gone up in value, you pull out your £30k and repeat the process.
As for the negatives of this strategy, well you’ve added a barrier to securing your new car.
In this example we’ve assumed that you’re positive cashflow with a profit of £500/month.
What if it’s less than that, what if you’re breaking even? You won’t be able to lease your car.
Also, it’s not that straight forward, you really need to know what you’re doing before starting.
If you’re not educated in property investing, you’d want to do so before buying any asset.
Buy Assets through a Company
Just when you thought that was all there is to the strategy, there is actually another level.
If you really want to level up, you’ll want to purchase the property through a company.
This could be through a Limited Liability Company (LLC) or a Limited Liability Partnership (LLP).
Once you purchase your property through the business, you could then have a business lease.
You can recover VAT on your monthly payments and deduct expenses from business profit.
If used only for business, you can reclaim 100% of the VAT on your monthly payments.
If there is some private usage, you can still reclaim 50% of the VAT on your monthly payments.
This means that it would cost you less to lease the vehicle then if you were to do it privately.
This doesn’t just apply to your monthly payments, but fuel and any other associated costs.
This is a key piece of the puzzle: not only buying assets, but buying assets through a company.
My thoughts on Buying Assets and Leasing Liabilities
Once I read about this strategy, it blew my mind. You really don’t know what you don’t know.
It’s funny because I am actually in this situation. I am looking to procure a new car next year.
For the money, my plan is to release equity from my house in addition to my current savings.
My strategy was to just buy the car in cash: no monthly payments, no interest, no headache.
After discovering this method, I just can’t justify spending that amount of money on a liability.
I’ll use the cash to buy a property through a LLP that I’ll use for serviced accommodation.
I’ll then use the monthly cashflow from the property to lease my business vehicle.
Will this be easy? Hell no, I’m going to really educate myself on this before I spend any money.
This will really take me outside my comfort zone in both property investment and business.
However, in order to grow, I believe that I need to step out my comfort zone to get to FIRE.
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