Should You Buy a New Tesla or That New Rental Property? The Decision is Clear.

Real Estate

Jun 14

Looking to buy a Tesla over investing in a single-family rental?

Tens of thousands of people have become entranced by Tesla’s electric vehicles (EV). From their self-driving capabilities and innovative software to their environmental benefits, what’s not to love? Incoming the tax credit rebates and more, many investors are grappling with whether they should buy a Tesla or owning a new rental property.

Choosing between owning a new Tesla or a new rental property can be challenging due to the financial outlay needed and the role it serves. But if we zoom out, and look at the ROI for each - the decision is quite clear.

The Breakdown: New Tesla Model Y vs. Investment Property

Whether you decide to buy a new Tesla Model Y or a new rental property, many factors might influence your decision.

The initial cost is certainly one of many considerations. For example, you may be shocked to hear that the price tag on that new Tesla Model Y is astonishingly similar to that of a typical down payment on a new rental property.

But the price tag is only one component of this equation. In fact, there are many costs and benefits to consider, including how the asset's value will increase or decrease over time, tax benefits, and the required upkeep necessary to keep your asset in good working order.

Let’s dive in and analyze some key factors that will help you determine whether owning a new Tesla Model Y or a new rental property is the smarter play.

1. Depreciation vs. Appreciation

Vehicles are an asset that depreciates or loses value over time. According to the Progressive Casualty Insurance Company, most owners can expect their vehicle to shed 20% of its value within the first year and 15% annually for the preceding 4 to 5 years.1

While many factors can affect your car’s depreciation rate, including make, model, and mileage, depreciation isn’t unavoidable. Despite the Tesla Model Y having better performance than certain other vehicles, evidence also suggests that EVs often have shorter lives than regular gasoline vehicles, which is something to consider.

While an argument can be made that owning an EV can save you money in fuel over time, making it a cost-effective alternative to traditional vehicles, fuel benefits alone don’t warrant buying a Tesla Model Y over a new rental property.

Speaking of time, it’s important to note that real estate is considered an appreciating asset, meaning its value typically increases over time. In fact, a recent study by Renofi found that home prices have increased by roughly 49% over the last decade.

That’s also not factoring in the passive income your rental property will generate over time, something a Tesla simply doesn’t provide. The extra money generated from your rental property can go towards new investment opportunities, into the costs of operating and maintaining your rental property, or other big purchases.

2. Tax Credits vs. Tax Write-Offs

Owning a new Tesla Model Y or a rental property can come with various tax benefits. But which ones are more lucrative?

First, purchasing a new Tesla Model Y allows you to qualify for the electronic vehicle (EV) tax credit This nonrefundable tax credit will help lower the tax liability for those who purchase qualifying EVs or hybrids.

The Inflation Reduction Act permits a tax credit of up to $7,500 for new EV models.2 But you can only claim one credit per vehicle and your income must fall beneath certain thresholds. Yet, this is nothing compared to the tax write-offs you can expect from owning a new rental property.

Currently, the IRS permits rental property owners to deduct a multitude of items to help offset rental income and thereby lower your tax liability. Qualified rental expenses can include mortgage interest paid, property taxes, operating expenses, and even repair cost, and are tax deductible.3

In some cases, it wouldn’t be extraordinary to pay upwards of $7,500 in mortgage interest alone, and mortgage interest, like many of the noted line items, is typically an ongoing cost meaning you can continue to deduct it year after year.

3. Maintenance vs. Repairs and Improvements

Regardless of whether you own a vehicle or real estate, there are ongoing maintenance and repair costs you will need to pay to keep your asset in good working order.

These costs are often less for a vehicle than a rental property simply because the overall asset value is significantly less. However, comparing the costs to their respective proportions is similar.

For example, financial experts often recommend that you budget between 1-4% of your rental property’s value in annualized maintenance and repair costs. This estimate includes no major renovations or improvements to make the property more enjoyable.

For a Tesla Model Y, you can expect to pay a little over $800 yearly in maintenance costs (which is already more than average car models).4 If we apply the same rule for a rental property to Tesla, calculating the maintenance costs about its book value, it places the annualized maintenance costs for a Tesla Model Y somewhere between 1-2%.

Doorvest’s Key Takeaway

Whether you choose to buy a Tesla Model Y or a new rental property, you must weigh multiple financial factors. Overall, making your investment decision based on your financial objectives is important.

Buying a new Tesla might seem like a viable option, but when you break it down, there are clearly some drawbacks compared to the alternative of investing in a new rental property.

For starters, you would be purchasing a depreciating asset, meaning the money you sink into your Tesla would lose value over the first few years of owning it. On the flip side, should you invest in a rental property, you can expect your money to grow as housing prices continue to appreciate long-term. You also can leverage the additional passive cash flow the property would produce.

Second, it’s important to weigh the tax benefits for both investment options. While both provide some upside, buying an EV is much more limited, as you only get a one-time credit, whereas owning a rental property allows you to write off key expenses on an ongoing basis.

Lastly, upkeep and maintenance are key components of both purchases. In proportion to their cost, the cost to maintain either asset is comparable. While you may see more day-to-day benefits with the Tesla, you will see more long-term benefits with a rental property.

All signs point to owning a new rental property as the superior investment decision in this cost-benefit comparison. While buying a new Tesla may provide immediate gratification, owning real estate will pay dividends long-term.

Sources

1 What Is Car Depreciation & How Does it Work? (n.d.). Progressive. https://www.progressive.com/answers/what-is-car-depreciation/#:~:text=How%20fast%20do%20cars%20depreciate,%2Dor%20five%2Dyear%20mark.

2 Parys, S. (2023). EV Tax Credit 2023: Rules and Qualifications for Electric Vehicle Purchases. NerdWallet. https://www.nerdwallet.com/article/taxes/ev-tax-credit-electric-vehicle-tax-credit#:~:text=for%20the%20program.-,What%20is%20the%20electric%20vehicle%20tax%20credit%3F,by%20the%20corresponding%20credit%20amount.

3 Lambert, G. D. (2023). Rental Property Tax Deductions. Investopedia. https://www.investopedia.com/articles/pf/06/rentalowner.asp#:~:text=As%20a%20rental%20property%20owner%2C%20you%20can%20claim%20deductions%20to,operating%20expenses%2C%20and%20repair%20costs

4 Lewis, D. (2023). What’s The Average Tesla Maintenance Cost? Jalopnik. https://jalopnik.com/advisor/auto-warranty/tesla-maintenance-cost#:~:text=According%20to%20RepairPal%2C%20the%20average,owner%20on%20yearly%20maintenance%20needs.

5 2023 Tesla Model Y Price, Reviews, Pictures & More | Kelley Blue Book. (n.d.). KBB. https://www.kbb.com/tesla/model-y/#:~:text=The%202023%20Tesla%20Model%20Y%20starts%20at%20%2447%2C490.,all%20three%20trims)%20is%20%2415%2C000.&text=These%20are%20manufacturer's%20suggested%20retail,%241%2C390%20destination%20charge%2Fdelivery%20fee.