I am finding that many of my clients are often advised that purchasing a car on finance will give them significant tax benefits and reductions.
However, accountants giving this advice are seemingly not taking into consideration their clients big picture plans of owning an investment property.
Whilst it is true, car depreciation can save you on your tax, for me, I would rather
invest in property which is an appreciating asset, rather than a motor vehicle that is a depreciating asset. Both Assets will save you through depreciation but property, will hopefully, appreciate over time.
I often like to share the story of Jacqlyn, one of my clients, when the question of car finance is brought to me. When Jacqlyn was in her late teens-early twenties, all her friends were getting fancy cars on finance, Jacqulyn put every spare penny that she had into savings towards investmenting in property. Jacqlyn is not a big income earner, but she used the savings that she had and invested in a property rather than a car.
Three years later she was still driving the same car while her friends were getting new ones, but she then used the increased equity to purchase an owner occupied home. Jacqlyn does call me to discuss getting a new car, but these conversations always seem to end with her saying that she would rather keep investing in property.
At 24 she owns 2 properties and an old car that gets her around, with her strategy by the time she is 40 she should own 5 properties.
I often get calls from Clients that have purchased properties off the plan asking me how getting a new car on finance will affect their impending settlement. I would have to say that 6 times out 10 if they hadn’t of called me we could have had a potential settlement problem. The repayment of $500 to $600 per month could be the difference between getting the investment property loan approved or not.
When you apply for an investment loan, the lending institution will assess your ability to repay your debts. If you have a considerable car loan repayment to make on a monthly basis, it will lower your borrowing power. Less borrowing power means you will need to settle for a cheaper investment property.
I know we all need cars and I agree they are essential for safety with a family, the decision just needs to take the overall strategy into consideration. For me the $500-$600 per month that it costs to purchase a car is better spent owning another property and if it is one or the other, I know my choice EVERYDAY. PROPERTY.
Simon Birch – February 2016
Sandridge Financial Solutions