Rent or buy equipment? The utilization math that decides it

Every contractor has had the thought standing at the rental counter: "I've paid for this machine three times over in rent." Sometimes that is true, and buying would have saved money. Sometimes it is not, and the machine you bought would be sitting in the yard eating payments. The difference almost always comes down to one number: how many hours a year you would actually run it.

What does it cost to own a machine per hour?

Owning costs come in two kinds, and keeping them apart is what makes the comparison work.

• Fixed costs, which you pay whether the machine runs or not: the payment or depreciation, interest or the cost of the cash you tied up, insurance, and storage.
• Running costs, which grow with every hour: fuel, maintenance, wear parts like tracks, teeth, and cutting edges, and repairs.

Spread the fixed costs over the hours the machine runs in a year and you get a fixed cost per hour. Add the running cost per hour and you have the owning cost per hour. Our page on equipment cost per hour walks through each part.

The important thing is that the fixed part per hour depends entirely on utilization. A machine that is expensive per hour at low use becomes cheap per hour at high use, because the fixed costs are spread thinner.

What renting really costs

Rental looks expensive per day, but it includes things owning does not:

• The rental house carries the payment, its own insurance, and most major repairs.
• You only pay while you have the machine.
• If it breaks, they usually swap it.
• You can rent the right size for each job, instead of making one machine fit every job.

What you still pay on a rental: fuel, delivery and pickup or your own hauling, damage beyond normal wear, and often a damage waiver or proof of your own coverage. And you pay for the whole rental period, including the days it rains.

Weekly and monthly rates usually work out cheaper per day than daily rates. Get real quotes in your area for the machine you are weighing.

The break-even: a worked example

These are made-up round numbers to show the method. They are not real rental or purchase prices. Use quotes from your own dealer and rental house.

Say you are looking at a mid-size machine, and the numbers look like this:

• Fixed ownership cost: $30,000 a year (payment, interest, insurance, storage)
• Running cost if you own it: $20 per operating hour for maintenance, wear parts, and repairs. Fuel is left out, because you pay it either way.
• Rental cost, spread over the hours you actually run it: about $60 per operating hour, delivery included

Each hour you run an owned machine instead of a rented one saves $60 minus $20, or $40. The fixed cost is $30,000 a year. Divide $30,000 by $40 and you get 750 hours. In this example, if you would run the machine more than about 750 hours a year, owning costs less. Below that, renting does.

Now look at how much the hours matter. At 400 hours a year, owning costs $30,000 plus 400 times $20, which is $38,000, while renting those same hours costs 400 times $60, or $24,000. At 1,000 hours, owning costs $50,000 and renting costs $60,000. Same machine, same rates. The utilization decides.

Be honest about utilization

The whole decision rests on the hours you would really run, and it is easy to be optimistic. Some ways to get an honest number:

• Add up the rental time you actually paid for last year on that type of machine, from the invoices.
• Look at the hour meters on machines you already own. The gap between what you thought you ran and what the meter says is often humbling.
• Count only work you are confident of, not work you hope to win because you own the machine.

Tracking hours per machine makes this easy. Our article on equipment maintenance tracking covers the weekly meter habit that gives you the data.

The costs people forget

• Transport. Owning a machine means owning the trailer, the truck to pull it, and the time to move it. On a short job, a rental house delivering to the site may cost less than your own mobilization.
• Maintenance time. Someone has to do the service, or you pay someone to. With a rental, that is mostly their problem.
• Downtime. When an owned machine breaks mid-job, you may end up renting anyway while you wait for parts.
• Resale. Some machines hold their value better than others, and what it is worth when you sell it is part of the true cost of owning.
• Taxes. Depreciation and deductions can change the math a lot. Talk to your accountant before deciding, not after.

Rent-to-own and other middle roads

Many rental houses and dealers offer rent-to-own or rental purchase options, where some of the rent paid goes toward buying the machine. That can be a good way to find out whether you would really use a machine enough before committing. Read the terms closely: how much of the rent applies, for how long, and what the buyout price is.

Other options worth pricing: a longer-term rental for the busy season only, a used machine for work that does not need the newest one, or a lease with a buyout at the end.

When renting is the smarter call

• The work is occasional, or tied to one kind of job you do a few times a year.
• The job needs a specialty machine or attachment you would rarely use.
• You are not sure yet whether a new line of work will last.
• Cash is tight, and a payment would squeeze the business in the slow months.
• Owning a bigger machine would also mean buying a bigger truck and trailer to move it.

Buying tends to win when a machine would be running most working days, when rentals are hard to get in your area during the busy season, or when the machine is core to what the company does.

TrackOver's equipment tracking logs hours and service by machine, which is the data this decision needs. If you want to start collecting it, try TrackOver free.

Common questions

How do you decide whether to rent or buy equipment? Compare the owning cost per hour against the rental cost per hour at the number of hours you would really run the machine in a year. Because the fixed ownership costs get spread over those hours, utilization usually decides it.

How do you calculate the break-even hours for buying a machine? Divide the yearly fixed cost of owning by what you save per hour by running your own machine instead of a rental. In this article's made-up example, $30,000 a year divided by $40 an hour of savings gives about 750 hours a year.

When is renting equipment better than buying? When the work is occasional, the machine is a specialty you would rarely use, a new line of work is unproven, cash is tight in the slow months, or owning the machine would also mean buying a bigger truck and trailer.

What is rent-to-own for construction equipment? An arrangement where part of the rent you pay goes toward buying the machine. It can be a way to test utilization before committing, but read how much of the rent applies, for how long, and what the buyout price is.