I get a lot of emails from people who are young and aspire to own an exotic car some day. Most are working on finding good jobs and establishing themselves financially. With today’s lending practices, you can buy an expensive car on just about any professional salary. After a thousand or so transactions, here are some tips.
1 – Get a credit card – These build your credit very quickly. Pay it off every month. Carrying balances on credit cards is never a good idea. It is important that you use only a portion of your available credit line. If you have a $5,000 credit line, try to keep balances under $2,500 and request limit raises every six months from your credit card provider. Low percentage use of revolving credit lines is a great score booster. Only use 2-3 cards. Don’t apply for a lot of them. I use an AMEX card and a Bank of America cash back card. It covers everything I could want them to. AMEX has a great points system and they are great internationally but you have to be careful with cards that have no pre-set limit. They will generally set the limit to the most that you have ever spent on the card automatically. That means if you spend $3k on it each month, that is your limit, and you will have used 100% of your allowable revolving credit each month which will hurt your score. If this is the case for your card, look for a big purchase that you know you will be able to pay off that month and plan on using the card for it.
2 – Get a car loan – Any car loan. Establishing “like” credit is very important. Obviously this may be much less expensive than the car you want to own one day but you need to establish a routine of making a car payment. The temptation will be to get the lowest payment you can but do not do that. Get the highest payment that you can afford. The monthly payment will be printed on your credit report. The 36 month payment on $20k is almost equal to the 72 month payment on $40k. Even if you don’t qualify for the higher loan, you can ask for the higher payment and demonstrate your ability to repay more than you borrowed. You will get a better interest rate and build equity faster. Here is more on the rules of exotic car financing. Use those rules to figure how to get yourself closer to being the perfect applicant.
A big part of this will be learning to budget your money. Figuring out how to anticipate and calculate true costs of ownership is important. Saving money is crucial for future down payments, reserves for repairs, and for eventually retiring so you will have time to drive your new toy! Know how much you want to set aside each month and don’t interfere with that. Manage your cash flow and you will never have to sweat your payment.
3 – Don’t buy cars that depreciate like crazy – If you go out and buy a brand new whatever, it is going to generally lose a lot of value. If the cars you buy to build your way up to your dream supercar lose a ton of value, then you are not going to have any money left to buy what you want when the rest of your financial profile makes you eligible. Even as you buy exotic cars – look for ones that have a chance to appreciate because it will open up doors to future purchases. Generally cars that are 5-10 years old from manufacturers like Mercedes, BMW, Porsche, Audi, Lexus, etc. are great options here.
4 – Don’t spend money modifying your car – Modifications do not add any value to your car. They might make it easier to sell but the return on investment will be poor. Keep your money to use as a down payment on the next one! I generally gravitate towards cars that are older, more value stable, and rarer. Those will usually have more of a maintenance liability so there is a gamble in the interplay between depreciation and running costs. That has paid off well for me in the past. Even the more reputable aftermarket companies like Underground Racing, RennTech, and Hennessey Performance will only see value increases of 10-20% of the amount spent on modifications.
5 – Build a relationship with a dealer – Being familiar with a dealership that knows what your goals are and how you are planning to get there is a huge advantage. Let them help you find good interim cars that will build your credit, retain value, and work well with their lenders. Bear in mind that high end dealers prefer to get cars back on trade that they have already sold. It helps them build value and keep future owners comfortable with their product. Your local dealer will also be able to offer access to fun events that they organize with the manufacturers.
6 – Build relationships with good lenders – Don’t start doing business with a bank that has a $100k cap on car loans if you want to buy a car that costs $150-250k. Make sure that they can continue to meet your needs. As you move up, though, borrow money from different banks. It builds the strength of your credit profile to have diverse lenders. If you apply to a new bank for a big car loan and they see that you have bought four cars using the same local credit union they will rightfully assume that some of your approvals have been based on the relationship rather than your actual merit as an applicant. Here is some more info on the particular ins and outs of exotic car financing.
7 – Get a mortgage – You can buy a reasonable car without a mortgage but it is very hard to buy a big car as a renter. Banks like to see a couple years of stable residential ownership history. It is also a great way to build personal wealth, particularly if you avoid high HOA costs, get a good interest rate, and pay low property taxes. Bear in mind, though, that you need to remain sensitive to your debt to income ration when applying for credit. If you buy something that you can’t sell and end up having to rent it, even with some positive cash flow, you will seriously hurt your DTI. When applying for mortgages you will want your monthly obligations to be 40-43% of your gross monthly income or less. For cars, generally the sum of your total outstanding loan balances needs to be less than your annual verifiable income.
8 – Know how to present yourself – When you approach a dealer or bank, know what they are looking for. I made a checklist for people to use when they are shopping for a car. Check it out and be ready. Make it easy for your deal to progress as you negotiate with a seller. If you are asking someone to discount a car or work hard with a lender on your behalf, always go out of your way to simplify the process. Be ready to sign and return documents quickly.
9 – Make sure you can prove your income – If you are self-employed and you write off every possible expense you can until your net income is $20k a year, don’t plan on buying a car. Banks are smart and they see past those things but the buyer’s have superiors to answer to. K9 or W2 income is really necessary until you establish yourself with multiple big car loans.
10 – Keep the dream alive. Watch Top Gear, visit showrooms, go to car shows, meet owners and get tips on success, continue to become educated, and be successful in all that you do. This is a great goal to have and you can get there. Be patient and know what you want. Don’t let anyone talk you out of it.