Construction Equipment – Rent, Buy or Lease?
When it comes to acquiring construction equipment for your commercial construction company there are a number of factors to consider when it comes time to decide whether you rent, buy or lease. The first thing to consider is how often the piece of equipment will be used. This includes looking at your current needs and workload as well as factoring in your projected future needs. If you are using the equipment 60 percent of the time or more than you are better off buying the equipment or choosing a lease to own option. If the piece of equipment is something you are only planning on using occasionally or seasonally or if it’s a piece of specialty equipment that you only need for a small number of jobs you should probably consider renting. Other factors to consider include calculating all associated costs, transportation of equipment, repairs and maintenance, working capital, depreciation, and resale value.
Renting construction equipment offers the greatest amount of flexibility. Most rental companies offer daily, weekly and monthly rates so you don’t have to pay for equipment that you aren’t actively using. It also frees you from having to bother with maintenance and upkeep, costly repairs and rented equipment can be written off as a business expense. You also don’t have to worry about transportation costs as most rental companies will deliver the equipment to your jobsite and pick it up when you are done. Rental companies generally have a wide selection of makes and models to choose from which gives you the opportunity to try out equipment from different manufacturers should you be interested in buying in the future. Most rental companies also carry the current model year of equipment meaning you get to uses the latest and greatest that manufacturers have to offer.
One of the downsides of renting is that the cost to rent is typically higher than a lease or loan payment. In addition, you need to take a look at the rental rates for the amount of time you plan on using the equipment to make the most cost-effective decision. Looking at a local rental company I found that if you are renting daily you end up paying more once you hit the three-day mark than if you had just rented for the entire week. Similarly, many of the weekly rates were approximately half of the monthly rate so a two-week rental would be the same as the monthly rate. In this instance if you needed the equipment for three weeks you’d come out cheaper just renting it for the entire month. You also need to take into account the availability of the equipment and plan ahead to ensure that the rental company can accommodate you needs and have the equipment available when you need it to avoid downtime.
When renting equipment, make sure and call around to ensure you are getting the best prices and that you are renting from a reputable company that keeps their equipment properly maintained and can provide emergency repairs or replacement equipment should something go wrong.
Owning your construction equipment means you determine how and when the equipment is used as well as having complete control over its maintenance and upkeep. Owning equipment means it’s always at your disposal when you need it and it allows your equipment operators to have a higher level of familiarity with using the equipment that could lead to higher productivity. The initial upfront cost is typically higher because of a down payment but monthly payments are usually lower than if you were to lease due to lower interest rates. When buying equipment, consider the resale value should you decide to trade it in or resale it when you decide to get rid of it.
Purchasing equipment will deplete your cash flows and can tie up lines of credit which are both important things to consider before making a decision to buy. Other costs to consider include maintenance, repairs, transportation of equipment to the jobsite, and storage. Many of the costs such as taxes, interest, insurance, repairs, and depreciation are tax deductible. The IRS Section 179 Deduction is available for both new and used capital equipment.
The deduction limit for 2016 is $500,000 with a $2,000,000 limit on capital purchases with a bonus depreciation of 50 percent. The bonus depreciation can only be used on new equipment purchases. Qualifying equipment purchases exceeding the $2 million limit will have the Section 179 deduction phase-out dollar-for-dollar and is completely eliminated above $2.5 million. If you are considering buying new equipment, now might be the time as the bonus depreciation of 50 percent will phase down in 2018 to 40 percent and 30 percent in 2019.
In order to receive the deduction, equipment must be purchased and put into place by midnight on December 31, 2016. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the Section 179 deduction permanent and the $500,000 cap will be indexed to inflation in future years in $10,000 increments.
Proper fleet maintenance is probably one of the most important aspects of increasing the longevity and efficiency of your equipment as well as maintaining its trade-in or resale value. If your company doesn’t have the ability to keep equipment properly maintained and serviced then you should probably consider renting or an operating lease for your equipment needs.
Leasing combines some of the benefits of both renting and buying. Lease options vary but are typically for a year or more. Leasing involves less cost upfront since you typically don’t have to make a down payment and it also frees up capital and doesn’t tie up credit lines. Leasing also allows you the option of getting a new model every couple of years. Some leases offer flexible terms or seasonal payments which allow you to skip payments of pay less during slower months. Leases tend to have higher interest rates and higher insurance rates compared to purchasing equipment outright and there are huge penalties assessed if you break you lease early. This means you have to pay the entire lease term regardless of whether or not you are still using the equipment. If you had rented the equipment you could simply return it if you no longer needed it and not incur any additional costs and if you had purchased the equipment you could simply resell it and recoup some of your costs. Some leases also include large penalties for damage and wear and tear on the equipment.
Leases are usually identified as either a capital lease or an operating lease though some manufacturers have variations on both. A capital lease means the lessee is treated as the owner of the equipment which means you are responsible for all maintenance, taxes and insurance which also means depreciation and interest on the equipment can be written off. Capital leases also mean you can take advantage of the IRS Section 179 Deduction of $500,000 that was mentioned earlier. Capital leases include a bargain purchase option to buy once the lease terms are fulfilled. Capital leases are typically longer and the payments are typically higher than for an operating lease. With an operating lease, the lessor is considered the owner of the equipment and is similar to a rental agreement. The lessor is responsible for maintenance of the equipment and all payments are considered an operating expense for the lessee. Both options have their advantages and disadvantages and should be considered when deciding what type of lease to undertake.
Depending on the size and scope of your construction company, choosing just one option probably won’t be best to meet all of your equipment needs. You’ll probably have some core equipment that you own that you are capable of maintaining and servicing while leasing other pieces of equipment will make more sense. You may occasionally have to rent equipment to perform specific tasks or during peak times for your business in order to supplement the equipment you already have. Regardless of what options you choose, be sure to consider all factors to make an informed decision on what best meets your company's needs so you won’t end up with buyer’s remorse or renter’s remorse or even lessee’s remorse.