You’ve been listening to all the BiggerPockets podcasts, reading the blogs, interacting on the forums, and going to all the meetups. Every day, you’re analyzing deals from the MLS and from wholesalers that you’ve met. You’re networking, learning, and doing all the right things, but it’s just not coming together. 

You need to make a change in your life for yourself and your family’s future, and there’s no room for error here. How do people do this, starting from scratch?

The biggest thing holding you back that you haven’t even considered is your car payment. 

Check Your Car Payment

Many investors are looking for deals that cash flow at least a bit—maybe a couple of hundred dollars per door or so. Nerdwallet reports that in 2022, the average used car payment in America was $516. And new cars? A whopping $725. 

That’s per month, folks—and it’s the average. Stack that on top of the fact that most families have two cars, even if they were used, and that’s an average of $1,032 per month in car payments. 

How would you like that cash flow? Well, you could have it tomorrow if you got rid of those car payments. 

“But I need my car to get to work!” Do you mean that job that you are trying to get rid of? Seriously, there are so many alternatives: drive a junker, ride a bike or a skateboard, walk, public transportation, or carpool. The options are endless. 

Think about this critically: Why do you need that car payment? I mentor many aspiring investors in my market, and nine times out of 10, they pull up in a nicer car than I have. I always ask about it, and the answer is always the same: Either they “need” it for work, or they need a “safe” car for their family. 

Well, sure, a 2010 Camry is nominally less safe than a 2022 Tesla Model Y, with all its fancy navigation panels and automatic this and that. But do you really need the latter?

Or you might say, “I’m a contractor, and I need my truck.” If you are a contractor making less than $150,000, the last thing you need is a $1,200 truck payment. The bed of a 2008 F150 can haul a box of nails just as well as a 2023 F350 with a lift. 

Why Real Estate in the First Place?

Before we delve further into the car payment conundrum, let’s talk about real estate investment and why it’s a savvy financial move.

Real estate is a proven asset class for building wealth over time. Unlike cars, which depreciate in value the moment you drive them off the lot, real estate has the potential to appreciate, generating wealth through both property value increases and rental income.

Here are a few reasons why real estate is an attractive investment:

• Steady income: If you invest in rental properties, you can enjoy a consistent stream of income from your tenants.
• Appreciation: Real estate tends to appreciate over the long term, increasing the value of your investment.
• Tax benefits: There are numerous tax advantages to owning real estate, including deductions for mortgage interest, property taxes, and depreciation.
• Diversification: Real estate offers diversification in your investment portfolio, reducing risk.
• Leverage: You can use financing (mortgages) to purchase real estate, allowing you to control a valuable asset with a relatively small upfront investment.

Delaying Gratification

With car payments, the inverse is true in every single one of these real estate benefits. How can we say that we believe that real estate is an obvious path to wealth while we are working a W-2 job and driving a car well beyond our financial means?

Honestly, we all need to check our egos. In American culture, cars have always been one of the statements we make about ourselves, and car manufacturers have done a great job of taking advantage of that weakness in all of us. When was the last time you used that $1,500 built-in drink cooler in your armrest? It sure seems like an alluring option when you are rolling into your car payment. 

There are no shortcuts in real estate, and we all know the way to win in life is through delayed gratification. Why should having your dream car be any different? 

You can absolutely have your dream car, whatever that may be, but you can have it later. If you don’t have enough passive income to cover those payments, you need to examine your budget. If you stopped working your W-2 job tomorrow, how long could you keep making your housing payments, insurance, living expenses, and car payments? If the answer is not “forever,” then you need to get that car sold yesterday and find another way to get around. 

Now, back to the high car payments and their impact on real estate investment. One of the primary culprits here is the need for immediate gratification. We live in a world of instant everything—fast food, on-demand streaming, and, yes, even instant car loans. It’s all too easy to succumb to the desire for immediate rewards, like driving off in a fancy new car.

However, this desire for instant gratification often comes at the expense of future happiness. When you commit a significant portion of your monthly income to car payments, you have less money available for investing. It becomes a vicious cycle: You buy a pricey car to satisfy your immediate desires, but in doing so, you limit your capacity to invest in assets like real estate that can truly change your life for the better. 

All of that, and we haven’t even begun to discuss the debt-to-income (DTI) ratio. When people with average incomes begin to invest and scale, the limiting factor that will smack them in the face the quickest is being shut down by conventional lenders due to their high DTI. If you make $80,000 per year and have a $500 car payment, you’ll struggle to find a conventional lender who will be able to help you scale. 

I know, I know—private money and DSCR loans are where it’s at. Sure, but DSCR loans are really tough to get those ratios on right now, with 8% and higher interest rates. 

Newer investors always want the best deal, and conventional loans are always going to be the best rates and terms available—that rate and those terms are what will make your deal cash flow or not. If you want the best pricing on your loans, you need to free up as much DTI as you possibly can. Getting rid of your car payment is a painless way to make a big dent. 

Opportunity Cost: What Could You Be Missing?

To put this in perspective, let’s consider the concept of opportunity cost—what you forego by choosing one option over another. In this case, the opportunity cost of having car payments could be substantial.

Imagine you have a $700 monthly car payment. Over the course of a year, that’s $8,400. Now, what if you took that $8,400 and put it into a brokerage account to save a down payment on an investment property or contributed it to a retirement account? Over time, that money could grow significantly through compound interest or real estate appreciation.

In contrast, the car you purchased will lose value year after year. It’s a classic case of prioritizing short-term feelings over long-term freedom.

Finding Balance

The key takeaway here is to find a balance between your immediate desires and long-term financial goals. 

If you’re itching for a new car, set yourself an income goal that will pay for the car. For instance, if you buy three properties that cash flow $250 per door over three years, your car with a $750 payment is essentially “free.” Your tenants bought it for you.

High car payments, driven by the need for immediate gratification, are very likely to hinder your ability to invest in real estate. While the allure of a shiny new car is undeniable, it’s crucial to weigh that desire to have a shiny new car now against your goal of being financially independent. Is it really worth it?

By finding a balance between satisfying your short-term desires and earning a financially free future, you can ensure that you’re not just driving in style today but also building a solid foundation for tomorrow. It’s not about denying yourself pleasures; it’s about making choices that align with the future that you build for yourself. It starts today.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.