When Do you Decide You Can Afford A Ferrari?

Yeah the only way to buy in my opinion ( I haven't yet but plan to someday) is in cash in full with money put aside for maintaning etc.

 

Your wife should just understand.... Its a guy thing.....
And just get one, or two or three..... you get the idea...

 

LOL, I'm a little more diversified than that. My mortgage is paid from my monthly earnings, not investments anyway.


[/QUOTE] Say you are well diversified and BinLaden goes with his original plan to have ten planes hit buildings, but he has wised up this time and chooses to target NFL games, 80,000+ fans at each, on TV with a lot of camera angles, how is your portfolio doing then? [/QUOTE]

My, aren't you the optimist! LOL Luckliy our President has Iraq well under control so Bin Laden is no threat.



[/QUOTE]Debt is a double edged sword, and that is why the rich and poor move further apart from one another, the lax credit with high interest rates makes for lots of victims when the bubble pops and it ALWAYS pops, every decade it happens [/QUOTE]

Well, I'll check my sun dial and see if any pops are due.

Ken

 

If you do not think that the vast majority of the herd is not following this housing bubble to the grave you obviously have not compared housing prices against the stock market lately. Many income producing stocks are near stagnant for five years, while a beat to death 1953 three bed room ranch is all of a sudden the invest vehicle of choice. Just like the last guy to buy eToys at $160 a share, there will be a shake out here as well. MOST people follow the herd, and the herd has gone into real estate lately and not into stocks.

You can borrow, leverage all you want, it can pan out beautifully for you, OR it can leave you broke whipped out and not a dime to your name. I came from an area where everyone had money, the home prices and taxes made it economically non-viabile for anyone but the top 1%. I saw many a credit card millionaire go down the drain, the more conservative seemed to last through any market conditions. I am not talking bank CD conservative, I am speaking of people spending 70% of their take home pay and investing the other 30% every single week into a well diversified portfolio. Within a mile of my parents home people were slapping up $2,000,000 homes everywhere as they were millioniares on paper when eToys, Lucent and others were flying high. They never got out, well they got out of those houses, but they never got out of the market. They kept buying on margin and then BOOM it was over, lost the house, lost the cars, the boat, the wife and kids split and you're broke. Had a guy like this said to himself...."I will sell $1,000,000 in my stock and purchase a $600,000 home and get myself a used Ferrari and a used boat, I should be ok..." No he had to have the 12,000 sqft house, the NEW Ferrari the New Boat and he would have needed $5,000,000 in CASH not in internet stock. Goes back to living in the best case scenario fantascy land. So borrow all you want and good luck with your returns in the future, just remember 1929 happened and people on margin perished, it is a risk you have to be willing to take. I am willing to be more conservative, you are not, so in 30 years we'll compare notes, I bet your holding will have fluctuated far more in value than mine but your maybe worth more at that time, or maybe you'll have gone bust, I know I won't.

 

LOL, I'm IN the housing industry! Wholesale lumber. Business is great, and Katrina (I hate to admit) has made me a fortune. I don't have loser stocks as investments; I don't know crap about that kind of stuff so I stay out.

Ken

 

I think "jvbjr" and I are on the same wave length with many of the things he has said.

i personally take a quite conservative approach to things, however paid off my first home at 23, am now 26 with a $500k house paid in full, 80-90% of income goes into stable investments and 6 months ago i brought a $70k car for cash, but only when i thaught i could warant the purchase and not sweat the loss of money.

i will not however buy a Ferrari until i have a passive income greater than that 'normal' income i earn to pay for my toys/maintenance.

 

Frank's right. There have been countless threads about this very topic. I'll get mine once I have my kids' college financing and my own estate planning figured out - then it's time to buy a toy - preferably a 512bbi.

 

You are using extreme examples of fiscal mismanagement to try and make the point that you shouldn't borrow money. Thats like saying 'I saw a guy with no legs and no arms almost drown himself in the ocean, so now I don't go swimming anymore. Its too dangerous.' In both cases, the situation does not apply to me.

I would never advocate over leveraging yourself and buying things with 'paper profits'. However, in my mind, its equally silly not to use the assets you do have to build even more wealth.

Let's use your 30 year example to make my point. Over that time there will be boom, bust, and mediocre years but overall there will be a positive trend. Expected value analysis tells you that over 30 years somone who earns a rate of return over their cost of capital will beat the guy who sits on the sidelines - by large margin! The key here is that the guy making the investments needs to make sure they can weather the storm during the bust years. If they lose too much capital they get knocked out of the game then they can't participate in the recovery phase. In this case the guy on the sidelines wins. The solution is easy - create a financial safety net that allows you to weather the bust years and then use leverage to your benefit to take advantage of the overall positive trend. In a 30 year game, fluctuations don't matter if you can still cover your costs and don't get yourslf into a crisis situation. Its the end result that matters.

 

you have to decide for yourself.

owner #1, can swing the lease payments, rents an apt. and is single, has no life and spends all his free time wanking/waxing to the red horse.

owner #2, has a $100m portfolio, 7 houses, fractional jet ownership, a 25 yr old wife (and 3 ex's)

they both decided they could afford it.

 

That is an ASSUMPTION based on past HISTORY, it is not a guarantee. You are looking backwards to a time when America was the the center of the universe, China is now taking over that role so our future is not are rosey as it might have been in 1985. We produce almost nothing here other than paperwork, as a result we ship our money abroad constantly reducing the cash here. At what point do other countries decide they will do our paperwork for us at half the cost? Call India lately for ISP issues or to speak about your checking account? We lived in a vacuum for a long time, then we opened the door and let the other air in. Open borders and a global economy is geared toward a standardized income level globally, GUESS WHAT that means the people in the US have to come down a few pegs as we were on the high side of the "average" globalization will create. Opportunities to get rich will still exist for the few, but the OVERALL American public as a whole has to face the reality that all that Buy American propagandy sounds good on TV, but the truth is they all run to WalMart and buy Chinese stuff. How's Japan's stock market doing over the past 20 years?

 

It is if you're selling lumber to the Chinese.

Ken

 

So invest globally, problem solved! Why on earth would I limit myself to the US? Want to help the 'overall' American public? Advise them to invest globally instead of telling them to pay cash for everything.

I am only wrong if GLOBAL GDP goes negative. Over 30 years, not going to happen. We still have this little thing called productivity that is generated by, you guessed it, debt backed investments.

By the way, this poor American country that is losing all its economic power is still forecasted by most to generate GDP growth of about 3.5% this year. Still better than the after-tax cost of my mortgage and I didn't even have to send my investments overseas. Good thing I didn't pay cash.

 

Well I decided I could afford a Ferrari went I figured out how to pay for it cash. I also decided what kinda of Ferrari that would be based on the price. There is more than just one price range. You have those that can afford to pay for an Enzo cash, and you have those that can afford to pay for a 308 cash. At the time I bought my Ferrari I wanted to get a 355, and the cheapest I could find was $95k. Well that was out of my "pay cash" range. So I bought a 348 "cash" for less than half of what the 355's were selling for.

There are Ferrari's that can be found for $18k. YES that's right $18,000. So there is a Ferrari for every price range.

The up keep on the cars are not cheep, but can be made cheaper by working on them yourself.

So buy the Ferrari you can pay cash for. It is the same as buying a house. Sure everyone would love to live in a castle, but not everyone can afford a castle. If you can afford a condo then buy a condo. If you can afford a mansion then buy a masion.

I hope you get my point.

You CAN own a Ferrari. It may not be the one you want, or it may be. But what ever it is "pay cash" for it.

 

This may sound fairly simple compared to the some other other replies. If you can buy a Ferrari and not have to change anything in your life, such as buy cheaper clothes, eat only Mac & Cheese, then your ready. No flame meant, but I think if you have to ask than you are not quite ready.

 

why would anyone want to own a ferrari ?

 

Would that be Northwest or Delta?

There is reasonable debt for reasonable expected returns, the problem is many take on UNREASONABLE debt with expectations of UNREASONABLE returns.

Every bankruptcy is the result of the inability to pay back debt. People who deal in cash rarely go belly up. My best customer was a home builder, he pooled the cash resources of his fellow Jews in the Livingston area to create a corporation. They bought their land for cash, often land that was not even for sale. Walk up to the front door of a farm, say "hello, can we buy your farm for $2,000,000 please?". They knew before they rung the bell that the town would allow them to build 147 homes on this piece of land. All materials were paid for by cash. He sold his homes 10% below market value IMO and never had a year where he closed less than 50 homes in our area. When he died at 83 he was worth about $20,000,000 himself and I have no idea what he earned the other investors. So here were a group of about 50 people that knew each other through their Synague that used their combine cash to create an empire, their only debt was their A/R net 30 days. By reducing their costs, NO INTEREST, they could pass this savings on in cheaper pricing which in turn created a steady flow of demand.

JUST BECAUSE you feel differently does not mean a idea can not be successful, as I just illustrated.

 

and instead of being worth a $20m, he could have taken on debt and become a bill pulte, and worth 10x 20x 30x times as much. what's the point here???? debt enables leverage

 

Of course a 100% equity financed venture it can be succesful. So can a 100% debt financed venture. You can find individual stories to make almost anything appear to be true, but that doesn't make the situation or strategy optimal.

Let's take the 100% equity backed builder you described. He pooled funds and gave away equity in his company to others. As a result, he had to share profits equally with those other people. Had he used a modest amount of debt instead, he would have made a fixed interest payment and kept more of the profits for himself. Instead of being worth $20M, he may have been worth $200M when he turned 83.

You said you were a finance major. Do you remember how to calculate the weighted average cost of capital (WACC) from Finance 101? You'll remember from the application of that formula that the cost of debt is always less expensive than the cost of equity. 'Keeping costs down' as you describe it is very focused on the short term. In the long run he gave away his profits to other people, which is far more expensive.

 

i was wrong. make that 75x wealthier.

 

Henry, you beat me to the punch

 

have 20 kids then go on welfare and unemployment, with the food stamps, you could unload them for about 20 cents on a dollar, and dont forget, get a job that pays under the table. with that you in fat city !!!

 

OR when the soft times came and many builders went bankrupt because the houses were not selling but they still owed money, he could have lost everything as well.

If you have to borrow $1,500,000 to buy the $2,000,000 piece of land, and then you have to spend another BORROWED $1,000,000 to clear and put in the roads, and then you have to put three models BEFORE you make your first closing, you probably have $4,000,000 in debt.

So say you can build 147 homes at an average closing price of $600,000, profit of $200,000 each. In theory you should have a gross profit of $29,400,000 before the loans.

Now the $4,000,000 at 9.5% for a five year construction loan means payments of $84,000.00 a month, total cost will be $5,040,000.

So the POTENTIAL to make $24,000,000 exists IF you can make those payments every month. You have to close 2.5 houses a month to get done in the 5 years, which sounds easy UNTIL the bubble pops. I've seen times when houses were sitting half done for a year awaiting a buyer to pick their colors.

Now if he used his own $4,000,000 to start the project, what is so bad about that? How is he losing so much? He is saving himself $200,000/year in interest payments. The upside for cash is $1,000,000 more at the end and less risk, I just don't understand how he can make MORE MONEY given the set number of houses and the profit margin per unit available. The ONLY way to increase profit in this scenario is to REDUCE costs.

If I have 100 items I can sell at $10 each, my gross will be $1,000. The only way to make more money given the $1,000 threshold I have is to reduce my costs so MORE of the $1,000 goes into my pocket not someone else's.

BTW, MOST of the stuff they taught at finance class was IBM scale ideas, where most of the money in this country is made more on the scale I am suggesting.