Contractors Hot Line is part of the Catalyst Communications Network publication family.
Contractors Hot Line is part of the Catalyst Communications Network publication family.
Should you buy or lease? For construction contractors, it’s a question you’ve probably asked yourself many times. And what you may have also found out is that it’s a question without a single answer. At any point in time, the buy-lease decision is one that requires considering a host of factors, including the tools and equipment you need based on current and projected jobs, and the relative costs associated with the investment.
“As a construction business owner, you need to decide whether you'll rent, lease or purchase the equipment you need for client projects,” said Kim Mercado from Next Insurance. “In some situations, the answer will be obvious. In others, less so. To decide which option is right for you, it's important to consider multiple factors.”
Should you rent, lease or buy construction equipment? The answer, according to Mercado, requires looking at the pros and cons of each choice:
Renting Pros
Renting Cons
Leasing Pros
Leasing Cons
But buying equipment is a significant investment, and it isn't always the right choice. A rule of thumb from Jason Perez, CEO of YARDZ, the provider of a platform for managing owned and rented assets in the construction industry, was cited by Mercado: If you use a piece of equipment more than 60% of the time, purchasing it may be more cost-effective than renting or leasing.
“However, even if your utilization doesn’t reach that benchmark, it could still make sense to buy if you’ll use it consistently for three years or more,” Perez said. “The benefits of buying are lower payments, ready availability and resale value when it needs to be replaced or removed from your fleet. On the downside are the need for a down payment, operating costs, and the need to deal with different types of equipment, manufacturers and parts. It's a major undertaking."
Timing Can Be Everything
Auction companies deal with construction equipment daily, and Ritchie Bros. is no exception. When to buy or rent equipment, according to the company, requires considering key factors.
Direct from the company, here’s an overview of some of the things you should bear in mind before deciding when to buy and when to rent equipment:
1. Current Financial Situation
This seems like the most obvious factor to consider — do you currently have the capital to buy or is renting a better option for now? However, you should look beyond your current situation and project your costs over several months or years. Although buying may be a larger one-time financial outlay, the cost of renting can add up quickly, and over a long period of time can end up costing you more, especially if the equipment isn’t being used for the entire rental period. And don’t forget: when you own, you can see a return on your investment when you sell.
2. Cost of Ownership vs. Cost of Renting
It’s also important to estimate the cost of equipment ownership versus the cost of renting equipment. With ownership comes maintenance and operating costs, insurance and other fees such as government licensing. Renting is generally an inclusive cost but given that a rental company has to turn a profit, you should consider that your rental fees will include the purchase price and the cost of ownership, both marked up.
3. Length of Project or Job Frequency
Of all the things to consider, project length or the frequency of jobs on the calendar could be the deciding factor in whether you rent or buy. If it’s a short-term job, or you need a specialized piece of equipment for a one-off job, then renting may make more sense. The risk, of course, is that if the machine isn’t being used for the entire time it’s rented due to changes in the project schedule or unforeseen hold ups; then you’re spending money on a machine that’s sitting and waiting, not making you money. If you’re working on a long project, or if you’ve got several jobs on the horizon, then buying probably makes better sense given that rental costs add up quickly the longer a job goes on.
4. Equipment Availability and Usage
The big advantage of owning your own equipment is that it’s available to you 24/7.
“If you own it, you control it,” as the saying goes. You can react to unexpected changes in projects or project schedules, take on jobs at a moment’s notice and complete projects with less downtime. Before you decide whether to rent or buy, you should also weigh the potential risk of a rental company not having the machine you need when you need it. Owning can be a plus to potential clients too, who know you’re not only equipped to take on their job, but are also a stable, trustworthy business.
5. Fleet Management and Inventory Control
Managing your equipment is also something to consider. If you have the skills and the time, you can save money over the long haul by buying some or all of your equipment and taking care of insurance, maintenance, etc. yourself. If you don’t, you may want to pay a little extra to rent. You’ll know where it is, who’s running it, and you can schedule jobs and equipment accordingly. For shorter-term jobs, you may want to consider renting, but buying gives you added flexibility.
Lots to Like About Owning
There’s a lot to like about equipment ownership, said Gerri Detweiler, an education consultant at Nav Technologies, Inc. One of those is tax deductions.
“Purchasing equipment outright has some tax benefits that you may enjoy,” Detweiler said. “You can deduct up to the full purchase price in the year you bought qualifying equipment, which will reduce your taxable income. This is called bonus depreciation and is in contrast to writing off the asset over its useful life.”
Detweiler also noted that a discounted cash flow analysis can be used to compare the cost of leasing versus buying. SCORE, the non-profit business mentor organization, offers detailed examples of how to run a lease vs buy analysis.
What Are Your Options?
Harry Fry & Associates offers some helpful definitions of purchasing and leasing terminology you may come across:
PURCHASING OPTIONS
Term Equipment Loan: Take advantage of terms of 24 to 120 months, depending on the age of the collateral. In lieu of a cash down payment, use the equity you have in existing equipment. Structure a variety of payment options for the full length of the borrowing terms.
Customized Equipment Loans:
LEASING OPTIONS
Finance Lease or Capital Lease: A non-tax-oriented lease, which provides your company with a stated purchase amount at the end of the lease term.
TRAC Lease: A terminal rental adjustment clause (TRAC) lease is a tax-oriented lease available for over-the-road, titled equipment. The equipment lease is structured with a residual guaranteed by the lessee. Generally, the TRAC lease requires a payment in advance. At the end of the lease term, the equipment can be purchased for the guaranteed residual amount or returned.
Tax Lease: An off-balance sheet lease that can help to preserve your company’s ratios and conserve capital. The tax lease provides your company with structured payments where you will only need the use of the equipment for a specified period. At the end of the equipment lease term, your company has the option to purchase the equipment at Fair Market Value (FMV), return the equipment, or renew the lease and keep the equipment.