I sometimes forget what color our minivan is, I can’t identify makes or models, and I get bored with car talk. You get the picture: I’m just not a car person.
But I have profitably bought and sold used automobiles. In fact, I discovered that I could make money from used cars without even touching them. Interested in doing the same? All you need is to have saved up a bit of cash.
How I Became a Used Car Investor
Years ago, my coworker John was looking for money to invest in a car. I had no idea what a “Corvette Stingray” was or why anyone would want one, but John’s car magazine convinced me that this one was worth around $5,000. I gave him $2,300 to buy the thing and another $900 for repairs, licensing and insurance. We would split the profit.
John loved cars, knew where to get a transmission repaired inexpensively, and was a natural salesman. Two weeks later, he sold the car in the parking lot at work during a break. I had seen the vehicle once and had never even sat in it, but I got my investment back plus $500 of the $1,000 profit. Shortly after that, another friend found a Dodge pickup for $900 and I gave him $1,300 to buy it and prep it for sale. I made $450 on that deal, without ever driving the truck.
Want to Try It Yourself?
If you have the money to invest and can find someone with the right knowledge and ambition, you can finance used car deals without knowing much at all about the actual vehicles. You should double check the value of your investments in a used car price guide, but with the right partner you don’t have to get too involved in the rest of the process.
Fortunately now, unlike when I was doing this, you can quickly gather information online. For example, if your partner calls you with an investment prospect, quickly look up the car on a review site like Edmunds to check for any common problems with that model. Pass the information on to your partner so he can properly inspect the car and use these known problems to negotiate a lower price.
How to Choose Your Partner
Picking your partner is the most crucial part of the process: you need someone you can trust. Even if you have good instincts about people, start your partnership with a small deal so there is less to lose. Have the car titled in your name as well, at least the first few times.
Carefully consider the personality of your partner. It’s likely that he doesn’t save money well, since he needs you to invest as a partner. That lack of budgeting skills is not a problem, but watch for relevant character traits and habits. For example, some people would never steal from you, but could make bad (read: costly) decisions. Will your partner stick to the plan or will he spend hundreds of dollars of your money on window tinting that he thinks is cool, but which doesn’t add any value to the car? Again, it helps to start with a cheap car to test the partnership.
Your partner should know more than you about cars, since the partnership is based on your money and his knowledge. It helps if he’s mechanically inclined, so you don’t get stuck with a lemon, but it’s more important that he knows the market. He should be able to look at a car and say whether it’s popular enough to sell quickly and what kind of buyer would want it. Refer to an online used car price guide to see if his estimates of value are about right, and encourage him to do the same.
Your partner should have some sales and negotiation skills. When working as your buyer, he has to talk sellers down to the lowest price possible to get a safe investment for you. On the selling end, he should be comfortable taking calls, meeting buyers, showing the car, and closing the deal.
I usually scribbled an agreement on a piece of paper so we had something in writing. Unless you consult an attorney or have it notarized, this unofficial contract offers little real protection. If a partner runs off with your money, you aren’t likely to track him down and he probably won’t have enough money left to bother suing him. However, having an agreement in writing makes the process feel more business-like and official, and will help prevent disagreements later about splitting the profits.
What about the legality of buying and selling cars without a license? Determine that before you start.
Each state has its own laws about when you need to get a license to sell cars. For example, Arizona’s rules say that if you sell four or more used cars in a year, you need to be licensed as a “used motor vehicle dealer.” Without the license, you could sell three cars in your name each year and perhaps three more that are titled in the name of your partner. Look up your state’s licensing agency or do a search on DMV.org for information about state requirements.
Talk to a tax professional to determine if you can report your profits as investment income or if you must report them as business income.
How Much Money Can You Make?
You aren’t going to make a living at this unless you flip high-end used cars or get a license so you can do more volume. But if you target used cars that retail for $4,000 to $7,000 and buy cheap, you should be able to make $1,000 to $3,000 per vehicle, with half of that as your profit if you split it with a partner.
In other words, you can make a few thousand dollars of extra income each year buying and selling used cars, even if you’re not a “car person.”
Your Turn: Have you ever sold a used car for a profit?