Rent, Lease or Buy — What’s the Best Option for Construction Equipment?
Economic conditions and market uncertainties have big impacts on whether construction customers are renting, leasing or buying equipment. Recently, there’s been a healthy level of activity in all three as the demand for construction equipment has grown along with the economy. Contractors have been buying more machines, but they’ve also been using more rentals and leases to supplement their owned fleet. There’s no right or wrong answer — it really depends on your unique situation.
To help you understand your options, we’ve laid out some pros and cons of renting, leasing and purchasing your next machine.
Renting is typically most popular for shorter term needs (months or weeks). Also, smaller companies may not own many pieces of equipment, and therefore may rent more often. If you’re interested in renting, you’ll want to keep machine availability in mind. The more standard a machine is the more likely it will be available for rent, whereas specialty equipment is typically more difficult to find and rent for short terms.
- Most flexible (month-to-month payments)
- Lower capital requirements
- Not responsible for maintenance
- No need to put a rental on the balance sheet
- Pay only for use and time you need it
- Can opt to try before you buy with a rental purchase option (RPO)
- Possible use restrictions
- Usually has higher monthly payments than loan financing and leasing (like buying a house, buying a machine has a slightly lower payment than renting, and the buyer is building equity)
- Likely to incur charges for damages
- Higher long-term use cost
- Limited to what’s on the lot
- Some specialized equipment may not be available when it’s needed
- In the U.S. right now, all rental payments may be expensed against taxable income, but currently with ownership, the full price of a machine could be depreciated for tax purposes in the first year; however, you should check with your tax advisor for your individual situation.
- Rental companies and dealers have the right to swap out a rental machine if it’s sold, which could cause delays and/or operator re-training.
Leasing adds a blend into the total ownership/use mix of your fleet, which most companies like. Leasing is more flexible than buying, but less flexible than renting — you have to commit to a period (usually 24 to 60 months). Typically, companies that have access to their own source of capital choose to buy rather than lease.
Most equipment can be leased, but the more specialized a piece of equipment is, the higher the relative cost of leasing becomes. This is because the party leasing the equipment may not have a big enough secondary market to sell the unit upon its return. Cost of equipment can also play a role, as more expensive equipment ties up more capital.
Currently, the number of leases relative to the amount of transactions (lease, finance purchase and cash purchase) is down significantly from 2018. Previously, lease payments may be incurred on the profit and loss (P&L) statement and may not affect a customer’s balance sheet. However, due to changes in International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Account Principles (GAAP), leased machines may now need to be added to the balance sheet and depreciated over the period of the lease, as would a financed machine or a machine purchased outright (rentals may not need to go through the balance sheet). Be sure to check with your tax advisor before making these decisions.
- Typically, low monthly payments compared to rental
- Return the equipment at the end of the lease term
- No large initial capital outlay
- Choose the specific features you want on the equipment
- Get a brand-new piece of equipment versus rental units that may have substantial hours on them
- Fixed term with obligations that you have to keep (e.g., 24-month lease)
- Commitment period is typically much longer compared to rental
- Never really build any equity
- Contract hours can be a challenge. If you build in more contract hours than you use, you’ve effectively paid more than necessary because unused hours aren’t refunded. Conversely, there’s a significant penalty for using more than the contracted hours — same as there are with miles on a leased car.
Some companies prefer to buy equipment as it’s part of their long-term capital strategy (that’s also sometimes true with leasing, but not rentals because they’re not building equity by renting). And recently, owner operators have trended more toward buying versus leasing. When buying, opt for bundled services, such as an extended warranty and a service agreement, to ensure your equipment is properly maintained. Today, there are monitoring services like Volvo’s ActiveCare Direct® that monitor equipment functions and alert owners and/or dealers of any major issues. These services are available for leases as well.
- Equipment ownership and building equity
- More economical for longer term needs
- You know the machine’s health and its dependability
- Currently in the U.S. you may be able to generally depreciate the entire cost of the machine in the first year, versus only the payments in a lease; this holds true for both new and used equipment
- Pride of ownership
- May be cheaper to rent for short-term needs
- The least flexible option — once you buy it, you own it
- In cycle management, you may want to de-fleet as your work slows down
Volvo Financial Services
When you’re in need of a new machine, Volvo Construction Equipment and Volvo Financial Services partner to help you find the best financial option for your specific situation. Many contractors can get into the habit of leases only, which doesn’t always make good financial sense. Through our extensive dealer network, we provide a broad range of options and pride ourselves on being very flexible at tailoring programs that work specifically for you.
Finally, if you’re in the market for high-quality used equipment, our wide range of Volvo Certified Used machines is available under the “Certified” icon on our used equipment site. Check out our used inventory today.
By Agako Nouch, Vice President, Sales, and Ryan Sherwood, Vice President, Retail Development