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I�m considering purchasing a used 2008 DA40-XLS to put online with my
flight school. I�ve built the spreadsheet and I think have all of the
relevant costs in there so as to try and figure out what my return on
investment would be (I know, it�s likely to be small/zero/negative).
The school is busy, and I�m pretty confident the plane would get used
enough to carry all of the cash costs plus the amortization needed to
cover engine and prop reserve, 100hr inspections, etc. What I�m
having a hard time with is depreciation.
My question is whether it�s best to assume depreciation on an hourly
basis, or over time. If the plane is in the air 20-30 hours a month,
what would a 2008 DA40-XLS (with all the bells and whistles: SVT, TAS
600, etc.) with 500 hours, that costs c. $260k today, be worth in 24-
36 months? What should I assume the value would depreciate per month
to calculate an IRR over the time period?
Also, what is a typically FBO cut? 20% off the top? 25%?
-- Justin Toner, May 14, 2011
If you're paying insurance, hangar, maintenance, etc., the FBO shouldn't take more than 15 percent off the top (they also will make money by marking up instructor time, remember).
After the plane has been "flight-schooled" I think it is reasonable to assume it would be worth $120,000 with a close-to-run-out engine (or about $150,000 with a new engine). So that's $110k of depreciation in three years.
-- Philip Greenspun, May 14, 2011
There are some good points below. Note that my flight school recently brokered a 2003 Cirrus SR20 (steam gauge) with an almost-new engine. After months it finally sold for about $112,000. I think it would rent for almost as much as a 2008 DA40.
-- Philip Greenspun, May 15, 2011
Not to be blunt, but why would you do this? If you are only interested in an investment then I'm sure you can find better ones. If you are doing it to fly cheap or free I would say use extreme caution. I have had several friends do this (172's) for the later reasons and it was a big mistake.
Maintenance will not be anywhere near the same cost as owning the aircraft. My friends who did it said it ran about 5x. Most students don't lean, ride brakes, land hard, run engines hot, etc.
Flight school aircraft left outside will take a cosmetic beating vs. a loved, waxed, hangared aircraft. I remember renting a new T182T, two years later I saw the same aircraft and almost cried, it looked rough. That kind of aircraft will not bring anywhere near the same money as the privately owned ones on Controller.
Flight schools all need late model aircraft to keep attracting new students. If you could make money doing lease backs they would just purchase their own and/or people would be lined up to do it on an investment basis.
I would ask to speak with the owners of other aircraft you see on the line and go from there.
-- Alex Baker, May 14, 2011
The usual agreements that FBO's want to agree to are rarely going to allow you to profit, and they will often end up costing more than simply hangering the plane. When I was selling and brokering aircraft, I believed that having more new Diamonds on leasebacks would surely do good things for GA. I had actually quit my lessons until I learned about, and flew in a Diamond. I then bought a Diamond, put it on leaseback, and finished my certificate. Later, I started selling them. I think I have ranted on this board about the whole scheme, so you can look for it if you want, but the bottom line is to make sure the school you want to work with will sign anything other than what they want to sign. They will often sound all negotiable up front, but once you buy the plane, they really only want a particular deal. That deal shifts all the risk to you, and they get upside only. At the same time, they have large downside if their own planes are not renting out, so you can see the kind of incentives they have to worry about your plane - negative ones. Most leasebacks are worse than single ownership. The only way to make it work in the end are the tax benefits (which now only really work with a leaseback, most small businesses won't generate enough hours by themselves), very high family income, and owning a plane that people both want and need (with need being key). Yes, some leasebacks work brilliantly, but it's usually on older planes that are primary trainers, or planes that wannabe airline pilots need to complete their training (having the only complex, high performance, or twin in a school that graduates a couple new instructors a month is a winner).
At any rate - If the school does not have Diamonds getting over 30 hours a month now, walk away. If the school does not have other high end, pleasure use aircraft getting over 30 hours, walk away. If the school's maintenance isn't top notch, walk away. If you are going to be upset when your plane becomes unattractive inside and out, walk away. If you can't afford to end the contract and keep the plane yourself, walk away.
Lastly, that plane may cost 260 today, but it's not necessarily worth 260 today. Who do you have helping you that was ever in the business, and knows what it's really worth? If you are paying 50k too much, is that something you can live with? No?
-- Eric Warren, May 15, 2011
Thanks for all of the thoughtful responses, all very helpful. Alex, to answer your question, the reason I considered doing it (decided against it) was because my ideal situation, a share with two other pilots, isn't available to me now. I've got no problem renting, but my flight school is so busy (one of only two Diamond Brilliance Centers in the country w/ three DA40s and three DA42s getting lot of hours) that there are times I want to fly but can't. And weekend trips are even tougher. I also considered it because the guys who run my school are top-notch pilots and take care of the planes.
This was going to be a way to get me more availability without being a sole owner (in a sense). But I just can't make the math even come close. And yes, I could surely find a better investment -- that wasn't the goal here.
Thanks again all.
-- Justin Toner, May 16, 2011
I am also considering buying a used airplane, but want to know the best way to do it. I am considering buying either a Cessna 172 or a CIrrus Sr20. I want to do it the smart way so I am thinking about building a company and then buying the airplane. I am initially thinking about advertise as a non profit organization like angel flight and offer free flights to wounded warrior. I was also thinking about advertising for aerial photography and possibly land survey. What is your opinion?
-- Francisco Torrent, April 12, 2012
Francisco, Unless your time is of no value, you won't save anything with an LLC and charity flying is now limited to 25%. The automakers and Congress conspired to destroy the tax advantages for the average business flyer. You would need professional advice on setting up a non profit, but the rules are fungible so they are likely to change against you after you set it up.
-- Eric Warren, April 13, 2012