Do you love cars? Are you already putting a lot of time and money in your automobile? Then it may be time to make money with your passion for vehicles.
To help you cash in on your passion, we interviewed Ronnie Danelian, owner of Legends Car Rentals in Los Angeles.
Ronnie began his entrepreneurial endeavors as an internet marketing master. However, with his love for classic cars, he transitioned his business venture into the company of his dreams.
Starting with only a $10,000 investment, his business rents exotic and classic cars to the LA upper class and now rakes in over $175k a month!
The car rental industry has a $92 billion global market share and is expected to reach $214 billion by 2027. In this article, we’ll take Ronnie’s expert advice to help you claim your share of this growing market.
So sit back and buckle up! This is our step-by-step guide on how to start a car rental business from scratch.
1. Get Experience with Cars
Ronne owned an internet marketing business and explained that he had no experience in the car rental industry before starting Legends. It’s true that the proprietors of some of our success stories also had little or no experience in their industry.
However, it always helps to have experience in a business before investing your time and money. In the car rental business, knowing basic car repair and the ins and outs of the industry will go a long way towards the success and profitability of your business.
Repair Classes and a Rental Clerk Position
A simple way to get experience is through your local community college. Many offer classes on auto repair and have onsite dummy repair vehicles for hands-on training and experience. If classes aren’t viable, there are other options to learn basic auto repair.
To gain industry knowledge and learn how to start a car rental company, you can apply for a position as a car rental clerk. The position allows you to explore the back-office systems car rental companies use for sales and to maintain their fleet.
You’ll also gain valuable insights on customer service and how car rental businesses buy, sell and trade vehicles.
2. Determine Your Type of Car Rental Business
Ronnie operates a business that rents out classic and exotic cars along with sprinter vans. However, there are many types of car rental businesses and each style has its own advantages and disadvantages. Remember what Ronnie said about the industry,
We’ll explore these different types in the next sections to help you decide.
Independent Rental Company
The first style of car rental business we’ll explore is an independent business. Typically, independent rental companies have smaller fleets (Legends one of the smallest) and work in a specialized market.
As an independent business owner, you call the shots at your business. All decisions fall on your lap, as does the responsibility and consequences of those decisions. It’s up to you to shape your brand and business model and put in the work of marketing your business.
Finances are another responsibility of the owner, which includes any problems that may occur. It helps (but isn’t a deal breaker) to have a nice cash cushion if you’re starting an independent operation.
Car Dealership Rental Office
Opening a car rental company as part of a car dealership is another option to explore. In this style of business, your company rents to customers who brought their car in for body work or other repairs.
In this scenario, you don’t need to keep a large inventory, which helps with startup costs. However, it limits the number of customers you have and ties your success to the success of the dealership.
If you’re not interested in starting a business from scratch, you have two options: purchase an existing business or invest in a franchise. We’ll explore franchises in the next section, so let’s look at existing independent businesses.
The key advantage to buying an existing business is that the structure of the business is in place, and it most likely already has an existing customer base.
However, you must conduct extensive research before purchasing. It’s important to understand the value of the business and its market. Ask questions like:
- Does this business fill a market need?
- Will the customers continue to be loyal under new ownership?
- Would the ownership transfer run smoothly?
3. Opening a Franchise
If investing in a car rental franchise, you’re purchasing the right to an established brand and business model. There are many brands, and each offer a long list of pros and cons.
Who is the Cheapest Car Rental Company?
Here are some top contenders and their initial fees and/or requirements:
- Hertz – $55,000 franchise fee and investment from $300k to over a million
- Dollar – Requires a new worth of $500,000 or higher and liquid capital of $150,000 or higher
- Thrifty – A net worth of $500,000 or higher and liquid capital of $150,000 or higher
- Budget – $20,000 franchise fee and with an investment between $150-$450,000
The key advantage of buying into a franchise is that the business is “turnkey.” Meaning the business model is simple and pre-determined. You pay to enter a franchise, but there is support from the company along with recognized branding and advertising built into the cost.
Franchises can also help find a suitable location for your business and finance some of the startup costs. It always helps to have support that will relieve the burden on your pocketbook when starting out.
When investing in a franchise, the owner loses autonomy over the business. And there are other costs associated with owning a franchise. For example, a franchisee will pay ongoing royalties to the franchise besides the initial fees.
Also, a sense of creativity in the business is lost as you lose control over your advertising and marketing decisions. Franchises also determine the range in which you can set prices, so there is little leeway in running deals or specials.
4. Write a Business Plan
Every business requires a business plan to be successful. After choosing a business type, this plan will help create your vision, strategy, and outlook. It isn’t just an outline. This is a detailed document used in every aspect of your operation (including loan applications and investor pitches!).
Your business plan should include items like:
- Executive Summary of the Business
- Objectives and Mission Statement
- Keys to Success
- Company Summary
- Market Analysis
- Marketing and Advertising Plan
- Management Summary
To help write your plan, here are some free templates!
- S. Small Business Administration (SBA) Business Plan Guide
- Car Rental Business Plan Sample
- Business Plan Template for a Small Business
- State-Specific Business Plans
5. Location, Location, Location
Coined in 1944, this chant is still on repeat in the real estate and business worlds. And for a car rental startup, the location is the lifeline of the business and links to your target market (see the next section).
This means that the availability and price point of a prime space can determine your target market. Or, you can seek a spot to fit the needs of a predetermined target market.
Use this 10-point slideshow to help you choose the best location for your business.
It’s best to consider two key factors: the property size and its vicinity to complementary businesses or services. For example, if you’re starting a car rental company that caters to business travelers, then the business should be near a travel hub like an airport or train station.
Or, if your business is focused on industrial or commercial rentals, then choose a spot in proximity of a sizable industrial or commercial zone for added convenience to the target market.
Last, be mindful of the saturation of the market in your location. As Ronnie explained regarding his business,
6. Who is Your Target Market?
Before starting a car rental business, you must determine your target market. In most instances, your target market is contingent on your location. This will help you determine several market factors such as:
- Income level
It’s important to align the needs of your market with your fleet to ensure success. For example, if your rental business is near an airport with and has a high traffic of executives, your fleet should suit those tastes.
Or, if your business is in a tourist destination that caters to high income, middle-aged clientele, create a luxury fantasy experience with a fleet that includes high-end and sporty vehicles.
Legends Car Rentals specializes in classic and exotic cars they rent to luxury-focused clientele and producers for movie and music video shoots. They have a niche market, especially in Los Angeles, and cater to their clients like a boutique shop.
Other specialized markets include:
- Outdoor and Recreational Vehicles
- Commercial Vehicle Rental
- Tourist Rentals
- Long-Term Rentals
It’s up to you to research your market and figure out what will work in your area. Fortunately, the SBA offers resources to help.
7. Name, Registration, Structure, and Licensing
A name in the rental car industry isn’t as key as in other industries. You can easily name your business “Bob’s Rentals” and have great success. However, as we’ll explore later on, web marketing is essential in the rental car industry.
Before choosing a name, check to see if the domain is available and register it with a domain service like Google, GoDaddy, or Namecheap. Also, think about how you spell your business name as easy access via web search will help drive revenue.
Note: If working with a franchise, a business name will only be an entity on legal documents.
What Type of Business is a Car Rental Company?
With key elements in place, you can now take the steps needed to create a legal company. You must register your business at the federal and state levels and establish a legal structure. Registering online is easy and will save time.
However, choosing a business structure (Limited Liability Corporation, Sole Proprietorship, Corporation, S Corporation, or Partnership) is a much more complicated process. Be sure to work with an accountant and/or business attorney to maximize your legal and tax benefits.
Typically, a car rental business will be set up as a Limited Liability Corporation (LLC) to avoid exposure of the owner’s personal assets to legal action. However, an attorney or accountant will know how to best gauge the options for the business.
Licenses and Permits
After establishing your legal structure, determine whether your business requires specific licenses or permits to operate. The SBA has a tool to help you check at the federal and state levels. Be sure to check at the county and city levels as well.
8. Clean Up Your Finances and Secure Funding
Money is one of the biggest hurdles for opening any business. But before you open your doors, you must organize your finances and secure funding.
How Much Does it Cost to Start a Car Rental Business?
Ronnie started his car business with a $10,000 investment. However, Ronnie’s business is highly specialized. In general, a rental car service is not the cheapest enterprise in terms of startup costs. Even starting with one or two cars can cost over $50k, and a mid-to-large enterprise can run from $500k up to $2 million.
Here is a list of startup and ongoing costs to consider:
- Business Registration and Licenses
- Business Attorney
- Location (deposit)
- Marketing and Advertising (website and social media)
- Office Supplies
- Inventory or Fleet (See the next section)
- Maintenance (Mechanic)
We asked Ronnie about his biggest ongoing expense now and he said,
Remember, the largest costs will be your insurance, advertising, and fleet of vehicles.
How Do I Fund My Business?
Funds to launch your business can come from:
- Personal Funds
- Personal Loan from family or friends
- Business Investors (Ronnie split his startup costs at $5k per investor)
If you want to learn more about raising capital for your business, we created a two-part video series on seed funding startups.
How to Open a Car Rental Business with No Money
The business plan you created comes in handy at this stage of your enterprise as it is a requirement to apply for SBA loan programs and other funding programs the administration has available for small businesses.
Other funding options include crowdfunding, a home equity loan, or a rollover for business funding from your retirement plan (ROBS). You can also apply for a credit card with an interest-free period to help kick things off if you have good credit.
There are also business loans, like equipment financing or a business auto loan, you can use to fund specific aspects of your business. These loans are easier to acquire as the equipment acts as collateral.
Educate yourself and understand the risks of loans before applying.
9. Inventory (The Fleet)
To start a car rental business, you’ll need cars! It’s the most important aspect of your business. The biggest question is whether you’ll purchase or lease your vehicles.
Purchasing Your Fleet
Obviously purchasing vehicles outright will be costly. However, owning vehicles could be the best path for your business financially as you can sell and trade in (see section on sales) for profit. Here are three options for purchasing your fleet:
Hopefully, you have some experience purchasing cars from a dealer, but it’s not the end of the world if you don’t. There are tons of resources and books out there on the art of purchasing a car. Remember these three golden rules:
Many Americans love to buy and sell cars, and there are thousands of local sellers who post cars on sites like Craigslist, Cars.com, and eBay motors.
In this situation, you’ll most likely purchase a used car, so be sure to educate yourself on the ins-and-outs of purchasing used vehicles.
The final option is to purchase a car from an auction. Large rental companies, like Enterprise, make large profits by purchasing entire fleets of cars in bulk at auctions. However, their business also acts as a used car dealer, which grants them access to dealer-only auctions.
Here are some non-dealer auction options to help you get started. Be mindful of salvaged and damaged cars, and only shop for clear-title vehicles.
Leasing Your Fleet
Another option is to lease your fleet from a car dealer. It’s like subletting your car.
Before leasing a vehicle you intend to rent out, review the terms of your lease agreement they allow this practice. Also, be aware that the dealer requires you to pay the lease regardless of if you rent the vehicle.
Ronnie stated about starting his business,
Instead of renting or leasing vehicles, Ronnie sourced partner cars from people who let him lease their cars out on commission. If you’re having trouble purchasing or leasing vehicles for your fleet, remember Ronnie’s advice:
What Cars Do I Buy?
Before purchasing or leasing your fleet, realize that you don’t always know which cars will be a hit. Ronnie explained the hit-or-miss principles he experienced at Legends, and it applies to the entire industry. Ask yourself these questions before determining your fleet style.
- Does the vehicle accommodate my target market?
- Can I get a good return when I sell the vehicle?
- Does this model have maintenance issues?
- What does my market research say about this vehicle in my market?
A great way to test a car’s viability is through your business website or on social media with a “coming soon” page or post. See what pre-reservations you get and how people react to it as a test.
Note: If you invest in a franchise, some offer fleet supplier programs and some don’t. Also, they will have data on the best cars to rent in your area.
Get rid of cars and re-fleet during the slow times.
10. Insure the Fleet
We asked Ronny how many cars in his fleet have been involved in an accident. He said,
Car insurance is a legal necessity of any vehicle, and you’ll need a policy to cover your fleet in case of an accident. Customers can pay more for coverage when they rent to cover the costs of the insurance, but remember what Ronnie said about the car rental business,
Insurance can be tough to acquire for a new business, but here is a roadmap you can use to secure it. However, expect it to be one of your highest startup and ongoing expenses. For Legends, Ronnie stated,
11. Set Financial Goals
With your business structure set up and a fleet of vehicles on hand, you can budget and set financial goals for your business.
How Do Car Rental Companies Make Money?
Most car rental companies make money in two ways: reselling vehicles at a premium rate and upselling contract add-ons, which go directly to the bottom line. The rental of the vehicle is purely operational revenue, unless you have a specialized business like Ronnie.
Luxury, high-end, and classic cars rent out at much higher rates and easily cover their note. However, insurance and maintenance fees can eat into your profits if you’re not careful.
Car Rental Business Profit Margin
With these models in mind, a standard car rental location shoots for 5-10% annual profit margins. While exotics and classics make 35-40% profit margins.
To put things into perspective, a good day for Ronnie is renting 5 cars and making $10k in revenue. Whereas revenue management of a standard car rental business has been compared to nuclear physics.
Ultimately, it will be up to you to calculate the value of your fleet and determine the conditions in which you should re-fleet (sell) your vehicles to generate profit.
The most important document, aside from a business plan, in the rental car industry is the rental contract. This document is an agreement between your company and the customer and explains the responsibilities of both parties.
It is up to the business to ensure that the customer’s insurance is valid and that they can cover the costs in case of an accident. As Ronnie explained, the biggest mistake of any car rental business is to rent to someone you shouldn’t.
Car Rental Agreement Template
You can use this car rental template as a base for creating or reviewing your contract. However, we strongly advise that you work with a qualified legal professional as this is the most important document protecting your business.
13. Marketing Strategy
Marketing in the car rental industry is a multi-billion dollar business. Ever notice how many car rental commercials you see during the Super Bowl? Unless you’re partnered with a franchise, your small business will need to find creative ways to reach the market.
Create a Website
Don’t worry if you have no experience creating a website or in digital marketing. It’s easy to find a knowledgeable web designer and webmaster to create and manage your website.
However, if you want to create your own site, you can use a web development company like Wix to design your site and logos.
Start a Digital Marketing Campaign
Ronnie stated that the best bang for his buck marketing wise has come through Google advertising. He first started with a budget of $300 and now spends over $8,000/month. However, Google ads can be expensive and less effective without experience.
Remember: word-of-mouth advertising is your greatest ally. And there’s no better way to get word-of-mouth customers than by providing outstanding customer service!
15. Customer Service and Profitability
Customer service in the car rental industry is unique and tied directly to the profits of the business. Here are the best tips to follow industry standard and drive your profits through the roof:
- Don’t compromise exemplary service for a cheap deal or extras.
- Upsell but don’t force the customer into add-ons they don’t want or need. They just want to rent a car!
- Consistently ask for reviews and feedback at the closure of the rental agreement.
- Monitor your online reviews and respond to every review, whether positive or negative.
- Train yourself and employees to speak to customers like a person and not a robot.
Is the Car Rental Business Profitable?
Yes! The car rental business can be a profitable venture—but not without the highest standard of customer service.
As Ronnie explained:
With this guide, you have all the knowledge needed on how to start a car rental business. With that, we’ll leave you with one final bit of advice from Ronnie for entrepreneurs looking to get into the industry: