Drivers

Buy Used, Build Equity

It may take you longer to get the first new truck, but you'll own it sooner.

July 2013, TruckingInfo.com - WebXclusive

by Jim Park, Equipment Editor - Also by this author

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Here are two things you need to know about buying a truck: it takes big bucks to play with big trucks, and there no such thing as a free lunch. Keep those two things in mind while planning your business strategy and you'll double your chance of success. 

It's tough getting started as an owner-operator, no doubt about it. It's especially tough these days with credit so tight, rates so low and equipment prices relatively high. Unless you come through the door with 50 grand in your pocket and a title to a few acres of waterfront property on Manhattan's lower east side, few lenders will even talk to you.

So how does one get a foot in the door these days? In the words of James L. Hebe, the former president and CEO of Freightliner and more recently Navistar's senior vice president, North America Sales Operations, "The old-fashioned rule in any business is to start out with a small investment, build equity, and when you ultimately can, you buy a new one, and use your equity as the down-payment."

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Hebe's reasoning is sound, and in practice it works most of the time. By small investment, he's talking about the $4,000 to $5,000 needed to get into a used truck, not the $15,000 to $20,000 you need for a new truck.

The other thing you're going to need is operating capital -- funding to tie you over until you see some revenue coming in. It will be two to four weeks before the first statement comes in, so you'll need between $5,000 and $10,000 in cash or available credit.

Once all that's in order, let's think about the buying strategy: new or used? If you're like most first-time truck buyers, a new one will be beyond your reach for the reasons I've just mentioned. After setting aside your operating capital, how much do you have left for a down payment? We're now talking used trucks.

There are risks with used trucks of course, and it never hurts to be somewhat mechanically inclined. Part of your operating capital could disappear into a repair, so keep that in mind. However, if you shop carefully, research the history of the truck, work with a reputable dealer and set your sights on the truck you need rather than the one you want, you can do well, even today.

Keep your eye out for the truck you need rather than the one you want.
Keep your eye out for the truck you need rather than the one you want.

Lease-purchase plans can be good options for first timers, but beware that not all plans are created equal. Some carriers make it too easy to get in. Those plans are probably loaded with all kinds of back-end fees and charges (see the first sentence of this story). Plans that require the lease-operator to bring something to the table are usually more successful.

"We like to see an owner-operator with some skin in the game," says David Strand, president of Wholesale Truck and Finance, a company that works with carrier to provide trucks and financing to owner-ops in lease-purchase programs. "We tried zero-down programs and most of the big carriers and event the OEMs have tried them, and in my opinion, they just don't work. With zero-down programs the incidence of default and the mistreatment of equipment is rampant."

Strand says some barriers to entry are good for the business because it preselects clients that are more focused on success. "You are less likely to throw away $5,000 of your own money than if somebody hands you a down payment or is let in to the game with little or no commitment," he says.

Also, it pays to beware of financing that is too easy to qualify for. There are ways truck salespeople can make a small down-payment look good on paper, thus qualifying you for a loan you may not be able to afford. If you're looking at a new truck, run the numbers and look at where you'll be 48 months from now on the payment schedule. If at that point you still own more than half of what the truck is worth, find the discipline to walk away.

 

Buying Used: What's the Plan?

There's a little more risk in a used truck, but buying carefully and weighing the lower front-end cost with the -- probably -- higher maintenance costs, your monthly operating costs (payment, maintenance, etc.) should be close to the same -- new versus used -- over the life of the truck.

When I mentioned an equity building plan, I'm referring to planning the buying and selling of several used trucks, each one slightly newer than the previous one, using the value in the trade plus a little cash, to buy your way up to new. Starting with, say, a four-year-old plain-Jane ex-fleet truck for $40,000 or so.

If you go in with $5,000 to $10,000 down and finance the balance over two years, you'll come away with a manageable monthly payment of less than $1,800. By the time it's paid for, it'll still be worth roughly $20,000, which now becomes the down-payment on your next truck. After 24 months, you'll have added $10,000 worth of equity to your business over and above your original down-payment.

Truck number two could be a three-year old truck selling for $50,000. You're still only financing $30,000 – same as before, and again over two years. Your payments stay about the same, but maintenance and repair costs should decrease marginally. And when you trade that one in after two years, you'll have increased your equity even more. Your three-year-old truck (now a six-year-old truck) might still fetch $30,000 or more.

A two-year old truck might cost you around $70,000 – who really knows four years down the road – but that's how we'll plan it. Anyway, you then buy truck number three with your $40,000 trade-in and cash. You're still borrowing $30,000 over two years, so the payments will be roughly the same.

So where are you five years after buying your first used truck? You're on truck number three, and sitting on equity of maybe $50,000 – if you've been diligent – for an initial investment of $10,000.

Compare your situation to your buddy's. He bought a new truck five years ago with a similar down-payment, and now he's looking at a $30,000 buy-out on a machine that's only worth $25,000. Where's his equity? He's in debt.

There's no guarantee it will always work out precisely like this, but it's not unusual to find owner-ops who've taken a decade or longer to get into their first new truck by building equity in used trucks and managing their costs very carefully. For some reason, they aren't the guys you hear complaining about being one statement shy of going broke.

Comments

  1. 1. Ted Ferranti [ July 11, 2013 @ 03:40PM ]

    On article buying new or used you forgot to include insurance. You need good sum of money for a down payment on insurance. The article is on the money. To many people want to profile and no clue the cost of buying or maintaining a truck. Been an o/o for forty years and did it just as article said to do. When you buy beyond your means you usually take cheap loads to keep rolling but by doing that you ruin the business for all us and you go broke.

 

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