What's new
Van's Air Force

Don't miss anything! Register now for full access to the definitive RV support community.

Financing vs. paying cash for a flying RV (financial gurus please chime in)

D

Duncannon

Active Member
If I have $300k invested into the stock market, I could potentially withdraw the funds to buy an RV; in my case it would be around $100k (a 6 or a 9 with a VFR panel). However, it could be better to leave the money invested and just finance, as I would lose considerable earning power of compound interest, not to mention I’d be taxed and would have to withdraw over that amount to compensate (withdrawing $50k one year and withdrawing $50k the next year would probably help save a bit on taxes). I’m not a financial expert by any means, but I’m aware of compound interest by continually investing over the years. That being said, if some major expense were to come up such as an engine overhaul, etc, I wouldn’t be bankrupt. And withdrawing $20k from my investment portfolio wouldn’t take away near the earning power (or be taxed) as much as withdrawing $100k.

Now if I had well over $1 million invested, I wouldn’t be quite as worried about withdrawing funds to buy a $100k aircraft, particularly if I were at an older age. I also have a Roth IRA, but I’m nowhere near the age to withdraw. And I may want more than $300k invested before owning an aircraft. But bad though it may be to have to withdraw, I wouldn’t be broke if there were a major expense. For those of you who bought their airplanes already built, what are your thoughts (I’d assume it’s different to finance a kit)? I figure anyone who is able to own an aircraft has just gotta be good with their money…
 
I financed my build mainly to keep a certain level of monthly ‘payments’ consistent. Once I was done building I just paid the rest of the note off.

I did hear the bank I used stop financing builds.
 
Duncannon said:
If I have $300k invested into the stock market, I could potentially withdraw the funds to buy an RV; in my case it would be around $100k (a 6 or a 9 with a VFR panel). However, it could be better to leave the money invested and just finance, as I would lose considerable earning power of compound interest, not to mention I’d be taxed and would have to withdraw over that amount to compensate (withdrawing $50k one year and withdrawing $50k the next year would probably help save a bit on taxes). I’m not a financial expert by any means, but I’m aware of compound interest by continually investing over the years. That being said, if some major expense were to come up such as an engine overhaul, etc, I wouldn’t be bankrupt. And withdrawing $20k from my investment portfolio wouldn’t take away near the earning power (or be taxed) as much as withdrawing $100k.

Now if I had well over $1 million invested, I wouldn’t be quite as worried about withdrawing funds to buy a $100k aircraft, particularly if I were at an older age. I also have a Roth IRA, but I’m nowhere near the age to withdraw. And I may want more than $300k invested before owning an aircraft. But bad though it may be to have to withdraw, I wouldn’t be broke if there were a major expense. For those of you who bought their airplanes already built, what are your thoughts (I’d assume it’s different to finance a kit)? I figure anyone who is able to own an aircraft has just gotta be good with their money…
Click to expand...
Does your rate of return (especially in tax deferred vehicles ) exceed the interest rate on borrowed money ? Not likely today, but was possible in recent past.
 
You have to do the math and compare. But Larry is right the bet is on the rate of return vs the interest rate. Your rate of return is a guess, so you might not guess right! I would agree that it's probably tougher with higher interest rates at the moment, but there is an opportunity cost there if you sell current investment to cash. Take the S&P 500, this year it's up like 14%, so even with a 7% interest rate, you still would have made money. But that's using past data, with isn't necessary future performance. To be fair though, value of 100k to 114k-7k-100k=7k vs 100k to 100k-100k=0, so it's a bit of a hair split on the gain. Yes 7k is 7k, but can very easily be zero or negative as well. You also can't take any of it with you in the end, so there's that choice as well!
 
In general I think it is best to pay cash. The expenditure becomes more real when you write a check for $100,00.
I also agree with Larry about rate of return vs interest expense.

However, if your main Financial assets are $300K in an investment account and an IRA, I would not want to pull $100K out of the investment account.

If you decide to finance, work on paying it off as quickly as possible. Every dollar you pay in Interest is a dollar down the drain.
 
Larry DeCamp said:
Does your rate of return (especially in tax deferred vehicles ) exceed the interest rate on borrowed money ? Not likely today, but was possible in recent past.
Click to expand...
Forgot to add, a loan will require hull insurance. This will discount potential gains. If you want to bet on the future, self finance without hull insurance ?
 
Duncannon said:
I also have a Roth IRA, but I’m nowhere near the age to withdraw.
Click to expand...

First, I am in no way recommending you withdraw money from your Roth IRA. However, you can withdraw contributions you made to your Roth IRA at any time, tax- and penalty-free. The growth/earnings is what is not readily accessible.

Having said that, I personally wouldn't finance an airplane or raid retirement accounts. If you don't have cash or money available in a brokerage account, then (IMO) you can't afford an airplane.

If the only choice is between financing and raiding retirement funds, I'd finance.
 
rph142 said:
Rule #1 for financial independence: Never finance a depreciating asset.
Click to expand...
Is "aircraft" as a category a depreciating asset? A new Cessna 172 in late 1960's was less than $10,000. That same Cessna today is easily over $80,000.

Regardless I still believe paying cash, if you have it in non-IRA/401K type funds, is the best choice. The interest rate for buying an airplane today must be astronomical!
 
In my first hand experience owning an airplane when you can’t afford to pay cash for it is pure misery. I do not look back at it fondly and don’t find it flattering. Taking money out of your retirement to buy a toy is the kind of thing that calls for an intervention. Deferred gratification works. I’m a firm believer that at the end of life the person with the best toy wins and an RV is a good toy but you have time!
 
Mile High Relic said:
First, I am in no way recommending you withdraw money from your Roth IRA. However, you can withdraw contributions you made to your Roth IRA at any time, tax- and penalty-free. The growth/earnings is what is not readily accessible.

Having said that, I personally wouldn't finance an airplane or raid retirement accounts. If you don't have cash or money available in a brokerage account, then (IMO) you can't afford an airplane.

If the only choice is between financing and raiding retirement funds, I'd finance.
Click to expand...

I would not mess with my retirement account, not even the contributions. It would be from the brokerage account.
 
Duncannon said:
If I have $300k invested into the stock market, I could potentially withdraw the funds to buy an RV; in my case it would be around $100k (a 6 or a 9 with a VFR panel). However, it could be better to leave the money invested and just finance, as I would lose considerable earning power of compound interest, not to mention I’d be taxed and would have to withdraw over that amount to compensate (withdrawing $50k one year and withdrawing $50k the next year would probably help save a bit on taxes). I’m not a financial expert by any means, but I’m aware of compound interest by continually investing over the years. That being said, if some major expense were to come up such as an engine overhaul, etc, I wouldn’t be bankrupt. And withdrawing $20k from my investment portfolio wouldn’t take away near the earning power (or be taxed) as much as withdrawing $100k.

Now if I had well over $1 million invested, I wouldn’t be quite as worried about withdrawing funds to buy a $100k aircraft, particularly if I were at an older age. I also have a Roth IRA, but I’m nowhere near the age to withdraw. And I may want more than $300k invested before owning an aircraft. But bad though it may be to have to withdraw, I wouldn’t be broke if there were a major expense. For those of you who bought their airplanes already built, what are your thoughts (I’d assume it’s different to finance a kit)? I figure anyone who is able to own an aircraft has just gotta be good with their money…
Click to expand...
I would NEVER try to advise anybody on financial matters. Look at post #3. As far as Rule #1, we finance autos/trucks, and they are definitely depreciating assets. But an airplane has NOT been a depreciating asset recently. The second statement on Post #3 is the more relevant. Cost of ownership can be overwhelming. You should be flying 100 hours a year to justify ownership vs. renting. Find a club, or perhaps a two or three person partnership. Find out how much you really are going to fly. Let the investments (hopefully) prosper for a few more years.
 
Duncannon said:
I figure anyone who is able to own an aircraft has just gotta be good with their money…
Click to expand...
There is “good” and “not dumb”…. I’m the latter, so take this with a grain of salt.

Since you are discussing a brokerage account and not retirement, tax implications aside, “I think” it comes down to fairly simple math: Do you earn more on that 100k than a loan will cost? If you are sure that you can make 10% invested and you can buy a loan for 8%, then finance (again, ignoring taxes). if it’s the other way around, withdraw.
 
Last edited:
Not sure I can add anything to the above posts.

Back in 1988, I wanted an airplane and was not sure how I could afford it. I did NOT have the cash, investments, or any desire to make interest payments.

Talking to a coworker that was a pilot and was nearing the age he could retire, he suggested paying as I go. He said: "IF someone gave you your dream airplane today, how much could you afford each paycheck to fly it?" At that time, we got paid weekly and my answer was $75 per week.

I set it up to have $75 taken from my paycheck and deposited in an account in the credit union. At the time, I estimated that my dream airplane would be around $35,000. Eight and and half years later, I had paid for and completed my dream airplane. If one adds 4% inflation each year to my estimated expense, I completed on budget but it took 8.5 years.

Everyone is different in the way they make, save, spend, and prioritize what they will do with the money they make.

Good luck.
 
The thing about planes is they are meant to be fun. For me the equation is simple….are they fun at 1$/minute? Yes. 2$/min? Maybe. 4$/minute? Not so much. I experienced this first hand with my Extra 300. It cost $4/minute to fly and as much as I like tumbling…the cost ruined it for me. So I fly my rv-7 for around $1.5/minute. Financing a toy just adds another layer of complexity that strips away at the fun for me. A down market and high interest rates might turn the $1.5/min into $4/min for the same plane without your control.
 
rph142 said:
The thing about planes is they are meant to be fun. For me the equation is simple….are they fun at 1$/minute? Yes. 2$/min? Maybe. 4$/minute? Not so much. I experienced this first hand with my Extra 300. It cost $4/minute to fly and as much as I like tumbling…the cost ruined it for me. So I fly my rv-7 for around $1.5/minute. Financing a toy just adds another layer of complexity that strips away at the fun for me. A down market and high interest rates might turn the $1.5/min into $4/min for the same plane without your control.
Click to expand...
Interesting! I have never looked at my costs by the minute. Easy to do. Quick calculations have me flying my -12iS at $1.08/minute. Not bad at all!
 
Lost of people have made some fine points in this thread about financial planning, but to nit pick one of them: When you're comparing investment returns vs loan interest, you need to account for risk. Those investments might average N% but that's not guaranteed the way your loan payments are mandatory.

Right now, a 3 month US treasury bill is yielding 5.39%, and a one year bill is still over 5%. That's your current risk free comparison. Good luck finding an aircraft loan at a lower rate than that--if you do, please let me know, I have a few Cirruses to buy.
 
Amadeus said:
Interesting! I have never looked at my costs by the minute. Easy to do. Quick calculations have me flying my -12iS at $1.08/minute. Not bad at all!
Click to expand...
And these costs include?
Flying 100 hours a year just my hangar and insurance cost is 1.20/minute
 
Mikeyb said:
And these costs include?
Flying 100 hours a year just my hangar and insurance cost is 1.20/minute
Click to expand...
This includes everything. Hangar, insurance, taxes, maintenance (do it myself), annual condition inspection (do it myself), and mogas 91 octane unleaded fuel. My total spend for past two and a half years is just under $6,000 per year plus fuel costs per hour at 4.1 gallons per hour for 120 flight hours per year.
 
I would never advocate to pull any retirement funds out to pay for a plane, house, or really anything. The benefit to using a lending institution really is to remove the headache of trying to predict the chunks to pull out of investments. Especially when interest was in the single digits, while investments were performing at double digits.
 
Mikeyb said:
In my first hand experience owning an airplane when you can’t afford to pay cash for it is pure misery. I do not look back at it fondly and don’t find it flattering. Taking money out of your retirement to buy a toy is the kind of thing that calls for an intervention. Deferred gratification works. I’m a firm believer that at the end of life the person with the best toy wins and an RV is a good toy but you have time!
Click to expand...
A friend of mine once said , " I have never seen a Brinks truck in a funeral procession".
 
Larry DeCamp said:
A friend of mine once said , " I have never seen a Brinks truck in a funeral procession".
Click to expand...
Take it with you.jpg
 
Amadeus said:
This includes everything. Hangar, insurance, taxes, maintenance (do it myself), annual condition inspection (do it myself), and mogas 91 octane unleaded fuel. My total spend for past two and a half years is just under $6,000 per year plus fuel costs per hour at 4.1 gallons per hour for 120 flight hours per year.
Click to expand...

That's impressive. At 100 hours/year, I'm paying $2.50 a minute, all in.

4.1 gallons an hour is also impressive.

I'd hate to think of what I was paying when I had a Pitts S-2B.

--Ron
 
ronrapp said:
That's impressive. At 100 hours/year, I'm paying $2.50 a minute, all in.

4.1 gallons an hour is also impressive.

I'd hate to think of what I was paying when I had a Pitts S-2B.

--Ron
Click to expand...
Very fortunate.

I just ran a report on Foreflight and 122.3 hours is the total flight time rolling recent 12 months. Fortunate to have a municipal hanger that is large enough for a -12 and a Zenith 750 Cruzer to share the space and the hangar rent. Fortunate to have a Rotax 912iS powerplant that sips fuel. Fortunate that I can use mogas at around $3.85 a gallon. Fortunate to have an E-LSA that allows me to do my own condition inspection despite not being the builder.

Replacing my -12 with a -14 has been a desire, still is a major desire, but I have come to realize my costs would go way up (and I'm recently retired) and I would not be able to fly nearly as often as I currently do.

Still, at $2.50 a minute for 100 hours/year you are getting a lot of air time for $15,000/year. When I was flying C172's and DA40's in a flying club it would cost me $21,000 to fly the same number of hours I'm flying the -12. You and I are getting these hours WHEN we want for AS LONG as we want and don't have to worry about what the last renter did or didn't do to the aircraft we are about to fly! This last sentence brings it back around to the original post in that if you do have the cash in non-retirement account funds then buy, buy, buy your own plane. It is the safest and least expensive flying you're going to get!
 
Amadeus said:
You and I are getting these hours WHEN we want for AS LONG as we want and don't have to worry about what the last renter did or didn't do to the aircraft we are about to fly!
Click to expand...
Yes. My gut feeling is that comparisons between renting and owning tend to wildly underestimate the non-dollar-figure benefits of owning. Admittedly, they’re hard to quantify, but they’re large. For example, there’s also the safety advantage of becoming extremely familiar with one airplane.
 
Financial Advice or Just Humor: An Old and highly successful dear friend used to give me his secret financial advice after a glass of Chivas Regal. "If you must borrow, always borrow 125% of purchase price and use the extra 25% to make the payments, it will eventually even out". His other advice: "If it FLYS, FLOATS, or FLUC'S, rent or lease it!" (I understood Fluc's to be as in severe fluctuations in value, I may have been mistaken on this!) I doubt these words of wisdom still apply after the pent-up demand on post covid worked its magic on the values of all recreation products.
 
I am not a financial guru so I am not sure why I am chiming in here;
You might want to ask yourself, if investing in the stock market and that compound interest was so great and as assured, why banks wouldn't do that instead of lending it to you for less interest.
I am of a the belief that I will only spend money that I already have on nonessentials/toys.
 
Bavafa said:
I am not a financial guru so I am not sure why I am chiming in here;
You might want to ask yourself, if investing in the stock market and that compound interest was so great and as assured, why banks wouldn't do that instead of lending it to you for less interest.
I am of a the belief that I will only spend money that I already have on nonessentials/toys.
Click to expand...
Risk.

Loaning money on a repossess-able asset is very low risk. That's why the rates are different for a mortgage -> car -> unsecured/signature loan. That's why large down payments where an asset would be very unlikely to underwater garner lower rates.

If I can hold someone's money and pay them 1-2% while loaning that same money out and getting 6-10%, why wouldn't I? Add the economies of scale and it's easy to see why the biggest buildings in any downtown are bank buildings.

The banks that get (more) greedy and increase their risk levels are the ones that wind up collapsing i.e. see Silicon Valley Bank and a couple of others just last yearf
 
Bavafa said:
...if investing in the stock market and that compound interest was so great and as assured, why banks wouldn't do that instead of lending it to you for less interest.
Click to expand...
Actually they do. It took a significant regulatory overhaul to make the likes of Chase Bank to become JP Morgan Chase. Banking CEOs were bored with their measly 6 figure compensation packages, and so they lobbied hard to join the ranks of CEOs making, not just 7, but 8 figures. I recall Citi-Travelers starting the shockwave. Prior to that banks were banks unable to so much as cross state lines until sometime in the 1990's.

I'm not a financial advisor and this is not advice, but...
For a quick rough-cut, test the size of your retirement kitty. If today your retirement kitty is not 300 times larger than your monthly take-home pay (to maintain today's standard of living), do not withdraw from your retirement kitty (a/k/a the 4% rule). You're not done saving. Of course, the actual size of the retirement kitty you eventually need can be increased or decreased for various factors like social security, taxes, and inflation and is between you and your advisor.

Owning an airplane is like owning a cottage...
Cottages and airplanes are assets, not investments. Assets incur expenses to maintain their value. A 172 now worth $80,000 when it was only $10,000 new had buckets of money thrown at it over the years. The 172 that did not enjoy buckets of money is still worth $10,000. Same would be true for a cottage.
 
eric.the.blonde said:
A 172 now worth $80,000 when it was only $10,000 new had buckets of money thrown at it over the years.
Click to expand...
Just buckets? I would've thought barrels.

Regardless of whether it is buckets or barrels all those expenses were factored into some owner/pilot's cost per minute. The base asset still improved in value making it an investment rather than a depreciating asset.

Which brings to light the extra value that we, as owner/pilots of experimental aircraft, have over certified aircraft owners. We can keep flying costs below $4 per minute. Can someone with a Cessna, Diamond, Cirrus, Mooney, Bonanza, etc. experience the same? Owner/pilot four hangars down from me just had a $6,000+ annual on his Mooney he finds just 20 to 25 hours per year to fly. There is his more than $4 per hour and we haven't even added hangar, insurance or anything else!
 
Last edited:
With all due respect, it’s a dangerous thing to start looking at the “cost” of ownership AFTER the decision to purchase has been made. It rarely makes sense to apply logic to a lifestyle choice or passion. Many of us have engineered our lives around this lifestyle choice at the expense of a strictly logical financial goals perspective. For many of us there is no going back until we are medically incapable of participating - no matter what the cost.

From that perspective, I think the OP is just looking to make the best decision between two options. If we start questioning much deeper than that we are likely to talk him out of the lifestyle altogether.
 
Thanks for all the replies. I have a Roth IRA that I max out at the beginning of each year, then I continually invest in the brokerage account. It’s not just a retirement account, but it’s basically a way to build wealth long-term. I just turned 37, and plan to keep working at least until age 65, possibly later, so hop there’s still time to build wealth but at the same time have enough youth left to enjoy owning an RV and not renting a Spam Can.
 
The answer is never as all encompassing as some may want it to be. Did I finance part of my build, yep, the engine and prop; aggressively paid off. Do I pay $1500-2000 or more in a monthly housing cost? Nope, not even a third of that. Do I have new cars and payments? Nope

Point is it's all in how you prioritize things. Would I love to be in a position to never finance things? Absolutely, but I chose to live life before I'm old and my body failing. There is a balance and that's different for everyone.
 
I am not a financial guru, probably the opposite.
I cash flowed all of the build except for the engine. I had been saving for a while with the goals of building an RV. While I could save $1000 per month to pay for the various aluninum kits, avionics, and finishing kit, coming up with over $30K in one lump sum at the end of an expensive build was hard. I liquidated some assets and partially financed the engine purchase. It's paid off now, and my situation is probably very similar to Jeremy in the previous post. At the time, the only debt I had was for the engine.
 
Duncannon said:
Thanks for all the replies. I have a Roth IRA that I max out at the beginning of each year, then I continually invest in the brokerage account. It’s not just a retirement account, but it’s basically a way to build wealth long-term. I just turned 37, and plan to keep working at least until age 65, possibly later, so hop there’s still time to build wealth but at the same time have enough youth left to enjoy owning an RV and not renting a Spam Can.
Click to expand...
Keep at the piling it up cause by the time you retire you are going to need at least 10-15 million in the market/bank to retire on.
20 years ago a friend of mine said. ," if its luxury item and you can pay for it without feeling the spent money then buy it" BUT if you may need that money down the road you can't spend it.
With 300K in the bank/market I do not feel you can spend it. But do not loose sight of flying in your own machine for sure. It can be done.
My luck varies FIXIT
 
Or...do what a lot of us have done. BUILD it, over time, buying sub-assemblies, engine, prop, avionics, etc., as you go and can save the money. Yes, it takes longer, but you get the satisfaction of building your own plane, the way YOU want it built, AND you don't have to borrow OR withdraw from a retirement fund.
 
Swingwing said:
^^This^^

Outside of your primary home, if it doesn’t make money it shouldn’t be financed
Click to expand...
Well, that’s one opinion.

Paying cash for everything isn’t a good idea, especially if you are young. Without established credit you will not be able to finance anything. I helped my son in law through that nightmare when he needed a new car; it wasn’t that he had bad credit, he had NO credit record. Consequently the bank would not lend ANY money, even on a brand new car.

Congrats if you can afford to drop that kind of money in cash but most can’t.

Financing is also about discipline.

That said, I agree with most of the posts here; aircraft are luxury items and pulling retirement funds to buy one, well, might not be the best plan. Everyone is different, though.
 
Swingwing said:
^^This^^

Outside of your primary home, if it doesn’t make money it shouldn’t be financed
Click to expand...
We bought our current car financed at 0%. This was 12 years ago, when our mortgage was around 2% as well. When we went to buy it I was sure the rate was 0% APR, but no, it was actually 0%. We had the cash to buy it outright, but we left it in the bank earning interest, and paid it off monthly instead.

We financed the RV in 2010 using a line-of-credit based on the equity in the house. The interest rate was a little higher than the mortgage, 3-4% I think, we paid interest-only for 6 months until we renewed the mortgage at 2%, at which time we rolled the line-of-credit balance into the mortgage. Added about 4 years to the mortgage, but I had the RV at age 39.

I realized that if I were to try saving for an RV, that by the time I saved enough to buy an RV while RV prices were likely to climb along with my savings, that i'd be retired before I got one. I decided I wanted to fly while I was young and could enjoy it more.
 
Those days are gone Rob. It worked for you and that’s great.
This was a common strategy at the time. I had a neighbor do the same, not with airplanes, but other stuff. He had a great job, leveraged his house for cars, boats, pool, etc…. lived large.
Lost his job, had no liquidity in any assets, and lost everything.
 
Snowflake said:
I realized that if I were to try saving for an RV, that by the time I saved enough to buy an RV while RV prices were likely to climb along with my savings, that i'd be retired before I got one. I decided I wanted to fly while I was young and could enjoy it more.
Click to expand...
This is one reason I partially financed the engine. I wanted to finish the build so I can start flying. I also knew Lycoming was going to increase the engine price every year. Lucky for me, I paid for the engine just before the Covid lockdown and the price was still reasonable. However, I would not finance the entire airplane build, and I was saving money for it a few years before and cash flowed it during the build.
 
JonJay said:
Those days are gone Rob. It worked for you and that’s great.
This was a common strategy at the time. I had a neighbor do the same, not with airplanes, but other stuff. He had a great job, leveraged his house for cars, boats, pool, etc…. lived large.
Lost his job, had no liquidity in any assets, and lost everything.
Click to expand...
Your example is “abuse” of debt. Some people use debt as a tool to improve their financial situation.

Many people view debt as “bad”, but in reality it’s just a tool that can be used for good or bad - like an axe. It’s up to the user to determine the final outcome. I think that’s what the OP is looking for in this thread.
 
An example was given, and a caution…..

I thinks this entire thread has degraded to the point of not being helpful anymore, pointing back at myself so no offense to anyone.
 
If you like the plane and have money, buy it
If you like to build, buy the kit and build
If you like your money more than you like planes, don't buy or build it.

There will never be a positive business case for what we do. The only exception is when we explain the story to our wives. LoL Then it is always money well spent that will not depreciate. LoL
 
You must log in or register to reply here.
Back
Top