If you are into the automobile industry and want to turn your passion into a business opportunity, then starting a car rental business must have crossed your mind. But is the car rental business profitable?
According to Global Data, the car rental industry in the U.S. is valued at $97.3 billion and is expected to grow by 7% through 2027. So what does this mean for you?
Can you make huge profits from this billion-dollar industry? How much money do you need to start a car rental business? To find out, make sure to read through the end.
Overview of Car Rental Business
Car rental refers to the hiring of vehicles from one party to another. These rentals are made on a daily, weekly, or monthly basis based on the needs of the renter.
Car renting could also be done for a period of twelve months or less, but renting cars for a longer period than this comes under leasing.
The car rental industry focuses on two markets especially:
- general use
- insurance replacement
General use rental companies serve the local market, airports, etc., and account for 73% of revenue in the U.S. car rental market. The insurance replacement segment accounts for 27% of rental revenue on the contrary.
The car rental industry in the U.S. is valued at $97.3 billion, with over 15,000 car rental companies operating in the U.S. and employing over 130,000 people.
To find out how is car rental business profitable, its pros and cons, etc., keep on reading.
How Much Money is Required to start a Car Rental Business?
The start-up cost for a car rental business running five cars can be as low as $50,000, and with more cars, it goes upto $100,000 and more.
The main determiner of how much you will spend largely depends on the number of cars you purchase.
Here’s a table that will help you figure out how much does car rental business costs:
| Startup Costs | Ballpark Range | Average |
|---|---|---|
| Setting up a business name and corporation | $150 – $200 | $175 |
| Insurance | $1,000 – $5,000 | $3,000 |
| Business licenses and permits | $200 – $300 | $250 |
| Business cards and brochures | $200 – $300 | $250 |
| Initial marketing budget | $500 – $1,000 | $750 |
| Website setup | $1,000 – $3,000 | $2,000 |
| Fleet of 5 cars | $40,000 – $75,000 | $57,500 |
| Office equipment | $2,500 – $7,500 | $5,000 |
| Office location deposit | $2,500 – $5,000 | $3,750 |
| Total | $48,050 – $97,300 | $72,675 |
How profitable is Car Rental Business?
On average, the profit margin for a car rental business is 5%-10%, and for exotic cars, it can be as much as 40%-45%.
So let’s say you have five cars, and you rent them for 275 days per year; then you will bring in nearly $137,000 in revenue and will get to keep $14,000 in profit (with a 10% profit margin).
Slowly as your business expands, then, let’s say you rent out 15 cars for 300 days per year on average. Then you will generate $450,000 in revenue annually and $45,000 in profit.
Similarly, you can keep adding more cars and increase your profits. The sky is the limit, really.
Typically, for a car rental business to be profitable, a car from your fleet should be booked for 72% of the total time. And to make this happen, make sure you spare no expense on marketing your business.
Costs Associated With Running a Car Rental Business
All businesses incur running costs, and here is the cost associated with running a car rental business:
- Maintenance: Cars require timely maintenance to keep running smoothly in the long run, and you cannot run away from this cost. The more cars you have, the more you will have to spend on maintenance.
- Rent: The car business requires large spaces for car parking. So you will require to rent out a place to park your car fleet.
- Utility bills: You would have to pay a number of bills, including electricity, internet, gas, water, etc., in order to run your business smoothly.
- Staff salary: Without staff and drivers, there cannot be a car rental business. So in order to run your car business successfully, you will require drivers and pay them a salary.
- Marketing: To find customers and increase the reach of your business in such fierce competition, you will have to spend good amounts of money on marketing and advertisement.
To run a car rental business with 30 vehicles, you will have to spend between $53,500 and $62,500 on average on operating expenses. The revenue of the car rental business is really good; however, so many operating costs eat up a good portion of your revenue, leaving you with only 5-10% net profits.
How to Calculate Profits for a Car Rental Company?
In order to calculate car rental business profit, first, we need to find the revenue of expenses.
Calculating revenue for car rental businesses
In order to find out the revenue for the car rental business, you will need to consider the following things:
- number of vehicles on rent.
- how often a vehicle is rented or utilization rate.
- average price per rental.
Revenue = Vehicles x Utilization rate x Average price per rental
So let’s assume you have 30 vehicles that are being used 50% of the time for $100 a day per vehicle, then your monthly revenue comes down to $75,000.
Once you have calculated your revenue and have figured out your total expenses and operating costs (based on the number of cars you have, staff, etc.), then you can find out your profit by using this formula.
EBITDA = Revenue – COGS – Operating Expenses
How To Start a Car Rental Business?
Pros & Cons of Car Rental Business
Pros of Car Rental Business
- High demand.
- Simple business model.
- Profitable.
Cons of Car Rental Business
- Requires huge upfront investment
- Accidents and damages can cost money.
- Requires maintenance.
Challenges & Trends in Car Rental Business
Here’s a look at the challenges and trends in car rental business as it directly affects your car rental business sucess:
Challenges
- Competition from on-demand transportation services like buses, taxis, etc.
- Constant change in fuel charges.
Trends
- The use of car bookings app is on the rise.
- Self driving vehicles are getting popular.
Bonus Tips to Increase the Profitability of Your Car Rental Business
You should know that rental car business owners hold a car for two years and then sell it out for newer models, ideally.
So to maximize the usage of your car and increase your profitability, here are some tips:
- Ensure that your fleet of cars runs a mileage of 60,000 miles each, as this is the mileage warranty offered by car manufacturers usually. So the more your car is used, the better.
- To increase profitability, try including extras. For example, you can charge extra for prepaid fuel, one-way trips, GPS, delivery of the rented car to the customer’s location, etc.
- To maximize your profits, try renting out luxury or exotic cars in the long run. Exotic cars have a profit margin of 40-45% as compared to normal cars.
Wrap Up
So the Car rental business is a profitable venture, but there is a lot of competition in this business from already established brands dominating the market.
If you wish you go for it still, then make sure you spare no effort in marketing your business for the ultimate success.
We hope this guide on is car rental business profitable was useful to you, and answered all your queries.
FAQ
How Much Should I Charge For Car Rental Business?
There has been an increase in the average car rental prices due to rising fuel prices and inflation.
As such, car rentals are averaging $100 a day. So rent for budget cars can be as low as $35, and for luxury cars, it can be as much as $250.
How to start car rental business with no money?
There are plenty of loans that the government offers to qualified candidates in order to start a small business.
To start a car rental business with no money, you can apply for the following:
- SBA loan programs.
- Home equity loan.
- Crowdfunding.
- ROBS
- Interest-free credit cards.
- Business auto loan
- Equipment Financing
- Funding programs.
Who are the major players in the car rental industry?
Avis, National Alamo, Hertz Budget, Sixt, Europcar Group, etc., are some of the key players in the car rental industry.
Amit Gupta is an experienced expert in digital marketing and co-founder of DrFranchises. With more than 11 years of knowledge in franchise digital marketing, SEO, email marketing, and social media marketing, Amit has helped many brands achieve incredible success online. As a passionate entrepreneur and owner of 7 franchises, he continues to study franchise models, looking at costs, revenue, and profitability to guide brands toward profitable growth. When he’s not working on digital marketing, Amit enjoys spending time playing with his beloved dog.