House or Car? Which Should you buy first?

by | Apr 25, 2022

Today, we’ll go over one of the questions a borrower asked me: “Should I buy a house first or a car first?” Some of you may think of it as a ridiculous question, while others might be asking the same thing. If you’re one of those people or curious as to why someone would ask which one should they buy first, follow along, as we’ll talk about it in detail.   

What should you buy first: a house or a car?

Before we even dive into this, let’s think about who’s asking this question. So, I had a borrower who asked this question because they had a mode of transportation. Their wife or their girlfriend, who would become their wife, took them to work every day. Technically speaking, they didn’t have a car yet, and they had a way to get to and from work. Now, they had a little bit of money for a down payment, and the cost of housing in their area was low enough that a 3½% down payment wasn’t too far from the price of a car. Hence, it was the choice to get a nice new truck, which he wanted, or buy a house. His logic was that housing prices were high, and he needed the truck because he could do more jobs. Essentially, this gives you an idea of the kind of person who might be asking a question like this.

When I was 16, I rushed out and got a car right away. The idea of not having a car in certain cities is ridiculous. Suppose you live in Los Angeles or a part of the country where things are very far apart, and there’s no public transportation; you need a car, especially if you’re always bumming rides off your friends and family. For me, getting a car was non-negotiable at 16, but that’s a different situation. I never had the option of buying a house at 16; I wasn’t legally allowed to buy a home until I was 18, so buying a car was my only choice. Someone considering the two is probably in a unique situation. Both a car and a house cost about the same on a down payment level, and the person already has an alternative mode of transportation. 

Just a bit of clarification here. This isn’t for young people who are 16 years old and can’t buy a house. It’s also probably not for people who live in a highly metropolitan city like New Nork or maybe even parts of San Francisco, where you could take the BART or the subway, pretty much everywhere you need to go and owning a car doesn’t make sense. Again, this is for someone looking for a nicer car and a cheaper home, and the question is, well, which one is the smarter move? 

Car vs House

Here’s what I think. You should buy a cheap car if you need one for work or your social lifestyle. You have to be happy, and if not having a car prevents you from having a social life or from working and earning a living (which will allow you to afford the house), then, of course, you need the car. However, this doesn’t mean you need to go out and buy an expensive car. You can get a used car, and my advice is to get the cheapest reliable used car you can. 

You can still find really old used cars for very little money if you look around. So if it’s a question about saving for a down payment or a car, I would say get something that has way over 100,000 miles on it but still runs and isn’t that complicated of a car. If you get an older car that doesn’t have a lot of electronics or something you can tune up yourself, or it needs minor repairs, then go for it. Perhaps, get something that was very popular and getting parts for it is not expensive. It will be your best bet because it will allow you to have that mode of transportation to work and have a house. 

Why Should You Buy a House Instead of a Car?

Why am I saying it’s smart to buy a house? I mean, at the end of the day, we’re in 2022, and home prices are high, but I still think it’s smarter to buy a house than a car. Once you buy a house, especially if it’s the first time you’re thinking of buying a home, you’re going to be a homeowner, and you’re going to start seeing the benefits. You’ll get tax deductions on the interest in your mortgage, there won’t be any landlord hanging over you, and you have homeownership. As the price of your house rises or maybe dips a little, you’ll start to understand that buying a home isn’t a case of you putting money into somebody else’s pocket every month; you’re growing an asset. 

You have two parts of a mortgage, your principal and interest. Your interest is burned, not on rent, but you get the tax benefit for it. It’s a tax write-off. The principal, which is the part of the loan you’re paying off every month,h that is like a big savings account, is an interest-bearing savings account. When you think about it, every dollar you put towards the principal of your house is essentially going into a big piggy bank, which is the ownership of your home. Most people will not just end up living in the first house they buy. They’ll sell it at a profit, especially if they can hold on to it long enough. This is something that is unique to homeownership in the United States, especially if you compare it to buying a car. 

Many people who buy cars do not sell them at a profit. They buy a car, and they lose the second they drive it off the lot. The used car market is not like the used home market. Homes appreciate, so if you have a choice between buying a house and buying a car, from a financial perspective, it’s a no-brainer. If you don’t need that car and can get away with not having a car, absolutely buy the house. Again, if you need the car for work or because that’s part of your social life and you need to function that way, get the cheapest car you can and put all the money into the house. 

The Value of a House

Once you become a homeowner, you start to understand that although you bought the car at a low price, you can put a little money into it and increase the value. So instead of sprucing up your car with a new paint job or getting an extra oil change, you can put fifty or a hundred dollars into a nice fixture for your house or change the light plates. Anything to make them a little more modern. You can get those Bluetooth Alexa enabled ones or anything that significantly impacts your life and the resale value.

Again, everything you put money-wise into your house starts to appreciate. For instance, if you update the kitchen by yourself for $10,000 – $15,000, you can go on to sell the house for $30,000 – $40,000. Everything in a home has a compound effect similar to this.

When you start thinking like a homeowner, you start thinking in terms of long-term and bigger goals. You know the price of a house is almost always going to be more than the price of a car, so you start getting more significant profits. When the home is worth much more than you bought it in about two years, perhaps, you can sell it and buy a bigger house or the same house and then pocket that money in profit that you made on the house and buy that car without having to work for it. There are a lot of possibilities, but the choice between buying a car and buying a home should be a no-brainer. Again, if you need a car, buy the cheapest one you can but always try and save for the house. The tax benefits are on your side as a homeowner. The longevity of owning a home is on your side, and the financial markets are always a favorite. 

Even if you bought something in 2008 when home prices were at an all-time high, you would still be profitable if you were able to hold on to it for ten years. That’s the miracle and the magic of homeownership. Even if you buy it now in 2022 when home prices are high, there might be a dip, but if you can continue paying that mortgage and you can continue affording that ‘rent’ (the payment for your house), which you were going to spend on rent anyway, it might just be slightly more. If you can stay there for some years, you will almost always come out ahead because real estate appreciates over time. It’s always up, so unless you’re getting the worst deal of the century where you’re paying double what a house is worth, I don’t see how that’s possible. You can look at realtor.com and check out the house. It isn’t worth double every other home in the area, so chances are you will make a good investment over time. 

If you’re interested in understanding the entire home buying process from start to finish, and it’s something you’ve never done before. I recommend that you read my article, where I go over the process step-by-step. I explained in detail the things you need to prepare for, how long it takes, what the process is like, the kind of document you need, etc. This helps you be ready, and there wouldn’t be as many surprises for you. 

You can also start by going through my explanation of loan estimates. This will help you to have an understanding of what the numbers are going to look like for you as a homeowner.

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