It's really quite simple to become a new airplane owner if you take things one step at a time, and work with knowledgeable experts in the aviation industry.
So it's time to get serious about your dream of aircraft ownership. Where do you begin?
Choosing the right aircraft for your mission is a critical step that requires evaluation in several different areas.
1. Consider the "90% rule".
What type of equipment will you need for 90% of your travel? If you'll only occasionally need a 5th seat, consider renting for the few times you'll actually fly 4 passengers. You'll potentially save $100,000.00 - that's quite a few rental hours! Are your trips primarily regional trips? A few knots of additional speed will go unnoticed while those same knots could be welcome on long cross country trips. What will your average trip lenth look like?
2. New or Pre-owned?
A good rule of thumb is to purchase the newest aircraft that you can afford. You'll save dollars in maintenance and your aircraft will probably require fewer avionic upgrades, paint and interior upgrades. A brand new aircraft will save you a substantial amount of money in interest charges, new aircraft rates are much lower than used aircraft rates, and you may see 20 year amortizations) and you'll be able to calculate your maintenance expenses to the dollar due to the warranty. Additionally, if you can substantiate business use, the tax dollars saved through depreciation of a new aircraft can actually PAY YOU for the first 4 years! To learn more about this tax benefit, visit Advocate Tax.
3. How much aircraft can you afford?
Again, there are some benefits to purchasing a new aircraft because interest rates are lower, less money is required for a down payment and amortizations are longer. The result is a lower payment, and aircraft finance companies approve candidates mainly on cash flow rather than assets owned. In many cases, the lower the payment, the easier it is to qualify regardless of the total amount borrowed. For more information, visit:
4. Safety -
This is the time to take a hard look at your flying skills. Choose an aircraft that you'll be comfortable with, one that matches your skill level. You can learn about the flight characteristics of different aircraft along with their safety records at AOPA. (The Aircraft Owners and Pilots Association).
So. . . how do you go about getting financing for your airplane? If you plan in advance, you can ensure a painless process!
1. Aircraft Finance Company or Personal/Business bank?
Sometimes your relationship with your bank can be very valuable when you need financing. Consider however, the expertise needed to deal with the FAA, aviation risk, and the unique tax benefits of an airplane to a business owner who shows intentionally low income statements. The aircraft finance companies understand and have expertise in these areas and therefore can extend excellent interest rates and terms in contrast to bank lenders who may be uncomfortable with this type of risk and extend rates to reflect their uneasiness.
2. When should you apply for financing?
While the process is not a lengthy one, it's always comforting to have an approval in hand early in the process. This will allow you to move quickly if the need arises.
3. What information will I need to provide?
Generally, you'll need to show a good credit history, 2 years of tax returns and a personal financial statement. Let's address each item briefly:
Credit History: It's a good idea to check your credit report prior to applying for financing. In fact, it's a good idea to check for inaccuracies on a regular basis, perhaps once a year. You can do this simply online and many times the report is free to the consumer.
Your own report may surprise you! Wrong names, addresses, open mortgages, credit cards you never applied for. . . all may show up on your account! Follow the credit reporting company's instructions for correcting the mistakes and make sure you have written records of all of your corrective actions. Any unused credit accounts should also be closed as they could be seen as potential available credit and affect your debt ratio. (We'll cover this later in this report). Don't just "cut up the card". . . you must close the account and request the report reflect the account was closed by you.
2 years of tax returns: Finance companies will grant an approval based on cash flow and "ability to make the payment." Therefore, your past two years of income are meaningful, and your future income potential is nothing but speculation. Together, your credit report and proof of income will provide the "snapshot" need by the finance company to grant an approval. Here's how they see it:
total monthly debt including airplane payment = debt
ratio
Total Monthly gross income
The debt ratio must be under 42% for a "quick approval."
So why do you want a "quick approval?" Well, if you're outside of the 42% ratio, you may still qualify for financing, however you may be providing plenty of additional paperwork!
Options if your debt ratio is above 42%
Larger down payment: This lowers the loan amount and thus the monthly payment. A lower payment will reduce your debt ratio.
Pay off high interest debt: You can lower your monthly debt substantially by paying off high interest debt like credit cards, or reconfiguring debt with lower interest rate loans. Perhaps a home equity loan to pay off your high interest debt.
Bank Guarantee (Letter of Credit): Sometimes your relationship with your bank can be beneficial in a situation like this. Your bank may not be comfortable with an aircraft loan, however your lender knows you and may be comfortable writing a letter of credit based on your history and reputation. With 2 years of payments guaranteed, the aircraft finance company is also comfortable.
4. Can a payment for a new airplane be lower than the payment for a pre-owned?
Believe it or not, it's usually easier to qualify for a new aircraft because the interest rates are much better (they're subsidized by the manufacturer) and the term is longer. The lower interest rate could mean thousands of dollars in interest savings over the course of the loan, and the down payment is often about half that of a pre-owned. This lower payment results in easier qualification due to the lower debt ratio.
5. Do all aircraft finance companies work the same way?
Generally, yes! However, the debt ratios and credit scores may vary slightly.
6. Additional resources:
Properly structuring your purchasing entity can mean the difference between huge tax savings, and the IRS paying you a visit! This is not a time to be a "do it yourselfer" or to hire amateurs. Even your own accountant probably doesn't have the expertise to properly set up an aviation company that also complies with the FAA. In fact, most likely your accountant will be relieved to hear that you've enlisted the help of an Aviation Tax Specialist.
A company like Advocate Consulting can help you save money with a properly structured aircraft purchasing entity. They'll help you maximize your tax benefits from depreciation and minimize your sales tax liability. Using SIFL (Standard Industry Fare Levels), an aircraft owner may be able to depreciate the majority of his/her aircraft with legitimate business use.
Business use may also come through a leaseback to a flight school or business. Again, an aviation tax specialist will ensure that you're properly set up to take advantage of the tax benefits you're entitled to through depreciation. It becomes clear that working with experts is critical when setting up your purchasing entity.
Where do you begin? Do you find aircraft insurance on the Internet? Do you shop price? How about the Yellow Pages?
The best way to find the best insurance for your aircraft is to begin with the best agent or broker! Since there are only a few companies that insure aircraft, and even fewer that insure school airplanes, the first agent you contact can obtain a quote for your new airplane from every underwriter and prevent you from working with another agent. The underwriters will only quote an aircraft risk once, so it's important to select the agent you would like to work with and let them do their job and take care of you.
When selecting a good agent consider the following:
1. Types of companies the agent writes ("A" rated?)
2. Do you have referrals to this person?
3. Can your Aircraft Dealer suggest someone?
4. How accessible is your agent?
5. Does he/she return calls promptly?
Sure, you can secure insurance on the Internet, or through an aviation organization, however it's advisable to have an agent because in the event of a claim, you will want someone to be your advocate. The better your agent knows you and your situation, the better outcome you'll experience.
This starts to get fun now! If you're picking up a brand new airplane at the factory, your Salesperson will notify you a couple weeks before your airplane is ready to deliver. It's time to look at your calendar and make your arrangements.
At the factory, you'll be assigned a Contract Administrator to facilitate the delivery. Expect to spend about 1/2 day with the delivery and a couple of days training with the factory instructors. Be sure to make time to tour the factory and eat lunch in the Cessna Employee's cafeteria (Yes, that's an experience in itself!). Plan to leave about mid-day. The four to 5 your trip home should assure a daytime landing and a setting sun for great pictures as you land your new Cessna at your home airport!
