Investing in A Car for Uber / Grab Car? Is It Worth It? – Part 1

For over a week now, I have been exclusively using Uber to get to work. I have a car – but traffic congestion, bad weather, parking costs and space unavailability, corrupt traffic policemen, road rage drivers, accident prone roads – have discouraged me from driving. Since I’m a doctor who take frequent car trips daily, Uber makes a lot of money from me.

This had me thinking – How can I turn the tables and make money from Uber or Grab Car?

Uber pickup point at SM Megamall
Uber cars ready to pick me up at the mall.

 

Is it wise to invest in a car for Uber or Grab Car use?

 

To answer those questions, it is always important to compute money inflows and outflows

What are the costs?

Fixed Costs: these are costs that you will incur whether you have rides or not

  1. Down payment and other “all-in” costs to bring the car out of the dealership
  2. Uber franchise accreditation costs with the local LTFRB (Land Transportation Franchising Regulatory Board)
  3. Monthly amortization for the vehicle
  4. Wireless internet and cellular connection (preferably the unlimited kind – a very reliable and fast connection will get you more rides)
  5. Smart phone
  6. Car maintenance costs
  7. Depreciation – A non-cash expense. Cars depreciate in value as time goes by (even if it sits in the garage unused – although using it for a car service will accelerate its depreciation; expect to have a hard time reselling a car that has been used for Uber or Grab)
  8. Opportunity costs – If you have a job or another source of income that you have to quit or forgo because you want to focus on driving Uber / Grab, the lost income from that other source or job should be part of your costs.

 

Variable Costs: costs that varies with the rides

  1. Revenue sharing (20%) with Uber (Uber already deducts this)
  2. Revenue sharing (60% – as with the usual 60-40 split) with the driver (in case you won’t be the driver)
  3. Car Fuel

 

Revenues:

  1. Uber/ Grab Car  fares and incentives

If you’re going to buy a car for Uber or Grab Car, you will get more of the revenues if you drive the car yourself rather than get a driver. Another advantage is that you’ll have better control over revenue generation.

 

Uncertainties:

  1. Incentives – Uber / Grab incentives for the drivers change from time to time. For the incentives, there may be many instances where Uber / Grab has to take money out of their own pockets to compensate the driver. But in the long term, Uber / Grab will have to depend solely on the money paid out by riders to survive, so don’t expect the incentives to remain good indefinitely.
  2. Fare Rates – Grab Car’s rates are more expensive than getting a taxi (around 2 – 2.5 times in my experience when they started); Uber while comparable with taxi fare, becomes more expensive due to surges. Increased regulation, legislation and competition might bring down those rates. Grab has recently slashed its rates by 30% due to competition from Uber
  3. Accreditation – Since its inception, Uber / Grab have been challenged by the traditional taxi industry and its backers. In my opinion, these car services will be here to stay, but under increased regulation; so expect the associated costs to increase as well.
  4. Transportation Infrastructure –  The ultimate solution to the traffic problem is an efficient public transport system. A very good one (e.g. network of trains) will dent demand for Uber / Grab cars. At present, the public transportation system in Manila sucks, so these car services will continue to enjoy demand.
  5. Network Effects – Remember Friendster and Myspace? Those services lived and eventually died due to network effects. The more partners and riders the car service has, the more popular and  viable it becomes. Once the service loses partners and riders, the demise of the service accelerates. A new car service might take away Uber and Grab’s popularity. This will probably have little effect on partners since they can easily jump ship to another car service.
  6. Availability of Drivers – if you aren’t driving your car, you’ll have to get a driver. A driver can easily jump ship (should be jump “car”) to another partner or car-service. If the competition for drivers become fierce, as a car owner, you might have to bring down your share of the revenues (say from 40 to 30%)

 

Part 2 soon…

 

– Finance, M.D. thefinancemd.com

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Finance, M.D.

Finance, M.D. is a practicing physician who dabbles in finance and investment. He has passed all three levels of the Chartered Financial Analyst (CFA) exams, all in his first attempts. thefinancemd.com

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