You choose: property profits or an auto wreck?

These days in Hong Kong, I see a lot of nice cars around. And more often than not, it’s a young guy behind the wheel.

Now, I’m in no position to lecture… if fast cars and fancy watches is what you want then great, it’s your call (my boat is my expensive vice!).

But I can’t help but wonder if some people wouldn’t be doing themselves a favour by just leaving the Porsche in the showroom and finding a better use for that hard-earned capital… to put their money to work for them.

Let me explain…

I’ve never bought a brand-new car

The first car I ever owned was a 1937 Ford Prefect. I got it in 1964, so it was (at least) second hand.

One of the next cars I owned was an old VW Combi purchased upon arrival in Port Elizabeth, South Africa in 1973. It was a bit banged up for sure, but it carried my wife and I through much of Africa.

And after that long journey, I sold it for roughly what I paid for it.

Over the years I’ve owned Toyotas, BMW’s, Mercedes, and even an Alfa Romeo at one point. None of them are particularly memorable rides.

And in 2015, I bought a 10-year old Jaguar…

I paid HK$50,000 or roughly US$6,500 for it at the time. Now that might sound like a lot of money to readers in the U.S. or Europe, but in Hong Kong that’s not a lot of money for a 3 litre V6 XJ6.

Why? Because the taxation on brand new cars here is huge.

The table below gives you an idea of how the increasing taxes stack up.

So for a US$100,000 car (manufacturer price), you’d be looking at a total price of just under US$190,000, after taxes, to drive it off the showroom floor.

This means, of course, that the second-hand market reflects these initial costs and hence overall car costs in this part of the world are pretty high. (Singapore is even worse, but that’s a different story.)

Now, according to the registration document for the Jaguar I bought, the first owner paid HK$750,000 for this car back in 2005.

That’s roughly US$100,000.

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Ten years after that, I paid nearly 94 percent less than the original purchase price.

The return on investment for the original buyer here works out to negative 23.7% per year on an annualised basis (that’s ignoring every other cost associated here).

So, buying brand-new cars in Hong Kong (or elsewhere for that matter) isn’t likely to be particularly lucrative. You probably already know that.

But here’s the other side to this story…

In early 2006, a few months after the original car owner in question bought his Jag, I bought a small investment property here in Hong Kong.

I paid approximately HK$1.4 million (around US$180,000) for a little one-bedroom walk-up flat with roof in Central, Hong Kong.

It ticked some important boxes in what I look for in buying investment real estate: It was a location where people where a suit and tie to work. I could add value through a very basic renovation. (I just wrote a book about what I look for when I’m investing in real estate – you can learn more about it here.)

I took a 50 percent mortgage. So my down payment after stamp duties etc. was roughly HK$750,000… the same as the new 2005 Jag.

The rent covered the mortgage easily. There was a little renovation cost as well.

Now, I could just as easily have bought myself a brand-new Jag… No doubt I would have enjoyed it a bit more than whatever old car I was driving at the time.

Instead I put a down payment on a little investment property.

In 2013, my son and colleague Tama negotiated the sale of that property for HK$7 million (and struck a deal with the purchaser that we would continue to receive all rent generated for the next two years).

It was purchased in 2006 for HK$1.4 million, andsold in 2013 for HK$7 million (plus the two years of rent).

I don’t write this to brag. There was no doubt some luck involved (the buyer was highly “motivated”). But that’s not the point, the property market was up 2-3 times anyway…

I’m telling you this story because when it comes to the big-ticket items, you might want to do yourself favour by leaving the Porsche in the showroom and finding a better use for that hard-earned capital… to put their money to work for you. In short, don’t just buy… invest.

You’ll get far better mileage…

Good investing,

Peter Churchouse

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