Benchmark & Best Practices - Lease or Buy
You asked for it and we listened. In this column, we ask operators of all sizes and from all walks of the industry a question about their business and report their answers so you can assess how your own company compares to your peers. If you would like to participate, please email Rob Smentek at firstname.lastname@example.org for next issue’s question.
TOPIC: Do you lease or buy your vehicles? In your experience, what have been the pros and cons to each approach?
I have always bought our vehicles in lieu of leasing. I feel better about the guarantee of equity on the back end. There sometimes may be positive write-off advantages with leasing, but I still prefer buying. It’s an advantage to own if I need to dump a car early: That hit is more easily absorbed. After 35 years and counting, I’ve always made money on the sale of used vehicles. I like guarantees, not maybes.
Gary Arndt, Owner
A Limousine Service in Pittsburgh, Pa.
I have leased on a few occasions, but those incidents have been rare, and due more to the low-dollar buy-out in the end. Typically, the company purchases our vehicles and takes the Section 179 accelerated depreciation expense to minimize income taxes. We have found this formula to be much more beneficial. Further, with our in-house maintenance and repair facilities, the age and mileage of a vehicle is relatively unimportant, as long as the appearance is properly maintained. This is particularly true in the case of our larger/more expensive equipment (e.g., minibuses) as they tend to be less age-sensitive. The bottom line: buy and depreciate.
John Critchett, President
Palm Beach Tours & Transportation in West Palm Beach, Fla.
In the past, we have leased our vehicles, but eventually switched to buying. I think that if you take care of your vehicles, they are worth a fair amount at the end and you get a portion of your expense back when you sell your used cars. Also, I’ve found that you get better rates on purchasing, and I feel like it’s better to control the paperwork, tickets, etc. instead of having everything go to a leasing company and then back to you.
Gary Day, Founder & CEO
American Limousines in Baltimore, Md.
We have always bought our vehicles because we have been told that leasing “does not apply” to high-mileage livery vehicles. However, I would entertain that option in the future, since I know that other operators in our area do it. I need to learn more about the option for the future.
Renee Dorsey, Operations Manager
Airport Limousine Service in Wheeling, W.V.
To buy or not to buy, that is the question. There’s no clear-cut rule as to which option is best, as there are benefits and drawbacks to both. The choice is determined by your personal preference as a company or individual.
For those who like to have a new fleet of cars and want to keep up with the latest models, leasing is probably more appealing to a company, as you can change your fleet more frequently and monthly payments are more affordable. However, if you are an individual who likes your car to feel like “yours” and is happy to keep it for a longer period between changes, buying is probably the best option.
Generally speaking, if a car has a high depreciation value, then you’d be better off leasing, whereas if a car has a low depreciation value, you’d be better buying and reaping the benefits later when you decide to sell it.
Michael Griffin, Director of Affiliate Relations
HYRYDE – Powered by Reliance Worldwide in London, U.K.
We’re firm believers in purchasing units with cash, particularly sedans and SUVs. However, when it comes to larger vehicles, this can be somewhat of a challenge. As such, we’ve traditionally financed the purchase of our larger vehicles, but we recently leased a limousine-style Sprinter. While the experience itself was very similar to buying, the primary potential for a headache is with the DMV. Since luxury ground transportation companies generally operate within different states, we naturally all have different DMV requirements. With leasing here in Virginia, we needed to take extra steps with our lender to secure the current registration for our leased vehicle. In the end, it was accomplished, but it seemed to be something of a nuisance that likely could have been avoided.
Other then these few additional steps, I really didn’t see much of a difference between the buying and leasing. The points were very close, with leasing being slightly lower. In the future, we’ll be buying, unless the point differential is worth these extra steps.
William Kerr, Owner
Camryn Limousine in Charlottesville, Va.
We currently buy our vehicles. The strategy for our existing fleet is three years old or newer. We average 45K miles per year, which exhausts our extended warranty after three years. This also ensures that we have new vehicles for our valued clients and affiliate partners. With the recent tax changes, we can take bonus depreciation and write off the full cost of any new purchases.
However, we are currently looking to add our first bus and are investigating TRAC leases (i.e., lease with option to buy) as the lifecycle of the bus will be longer.
Mark Kini, Founder & CEO
Boston Chauffeur in Beverly, Mass.
When I first started my company, I was so eager that I purchased two used black sedans with 52,000 miles. My thinking was that by purchasing the vehicles with no debt attached, I’d make money immediately. The idea was great and I did make money; however, I wasn’t building “good business credit.” I was shocked to discover this when I found my dream SUV and went to finance it. After investing a good deal of time to find the perfect Navigator, I was in a situation for the first time since college that that I needed a co- signer. My personal credit score was great but I hadn’t yet built up enough business credit in those first 14 months.
I have since started leasing my vehicles, which allows me to sustain good business credit. While I’ve paid a little more, it’s OK as it’s let me build my business. Leasing allows for constant change with flexibility for upgrades, which keeps my company on trend. I’ve had the same leasing company for years, and I’ve been thankful to be able to lease and build credit at the same time.
Wendy Kleefisch, Owner
Brevard Executive Transportation in Indialantic, Fla.
We finance all our vehicles. As for the benefits of financing vs. leasing, with financing you can use accelerated depreciation to write off the value of the vehicle immediately. This can help with tax planning, but the caveat of accelerated depreciation is the next years of payments are not deductible, since you took the deductions already.
Jason Messinger, Owner/President
BBZ Limousine & Livery Service in Bergenfield, N.J.
In the 12-percent-interest market of the 1990s, the first vehicle we purchased was a used 1985 54-inch Lincoln Armbruster for $13,000 with manageable payments of $400 monthly. We ran it for over 300K miles, but we were “upside down” with the loan due to the low payment and longer terms: lesson learned.
Based on advice we received at a trade show, we eventually went with a four-year loan with a $1,500 monthly payment, with a replacement every four years for reliability and warranty. However, with the heavier payment, we were “upside” down only for the first two years.
Budgeting for larger equipment payments has enabled us to upgrade constantly. The advantages of a new fleet and higher payments are reliability and the premium pricing that comes with servicing five-star clientele. Depreciation is usually plentiful if needed, but the fleet is efficiently utilized for profit.
For our fleet, sedans are all bought new, and we have them on a three-year rotation cycle. For SUVs, we buy used one-year-old rental fleet vehicles with a 100K-mile certified pre-owned warranty or new livery models with a three-year, 150K-mile warranty over 36 months. Our used vehicles have an approximate two-year rotation; they come with around 25K miles, and we phase them out at 95K, before transmission issues trend to occur.
We shop the rates between the banks and leasing companies to find the best financing. Ultimately, it’s more about payment stress threshold and budget planning.
Glenn Stafford, President & CEO
Love Limousine in Richmond, Va.
I always buy as I see more value in it in the long run. We don’t run our equipment as hard as many operators in the bigger cities, so we are able to keep our vehicles a little longer.
Scott Woodruff, President/CEO
Majestic Limo & Coach in Des Moines, Iowa
We’ve loved hearing your answers to our benchmarking questions—but we always welcome suggestions for future topics, too!
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