Appliances – To Repair or Replace: That is the Question

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Got a text message from a tenant recently that said the following:

“Hi Frank – There is a problem with our heat. It was working well then a few days ago it stopped making warm air and started making a loud noise. It also smells like something is burning.  We turned it off for the time being, but if you could send someone to look at it ASAP we would appreciate it.”

The tenant was referring to the heating system for her unit in a duplex I had recently gut renovated and the only pre-renovation system that was not replaced was the heater that serviced the second floor unit.  This particular system was in working condition but was 20 years old so it had already met or exceeded its life expectancy.  I contacted my local HVAC repair company and they went out and quoted me $800 to repair the unit.  The cost to replace was ball parked verbally over the phone to be in the $2,000 – $3,000 range. 

I decided to have the unit repaired not replaced since until now it had worked just fine.  Once the repairman got started on the repair he realized he would need to order another $400 part to finish the repair.  I asked for a formal quote to have the unit replaced and they came back at $2,100.  This time I opted to replace the unit.  Going through this process recently made me wonder if there was any formal analysis or general rule of thumb that pertained to repairs versus replacements for appliances or systems in an investment property.

Variables To Consider

When deciding whether to repair or replace an appliance or system these are the variables that you should consider:

  1. Repair cost vs. Replacement cost – what’s the price difference?  Most times if the price to repair is substantially less than replacement it will make sense to repair.  If however the repair cost is very high then replacement might be a better option
  2. Age of system – if the system has reached or exceeded its life expectancy than this favors replacement.
  3. Will repair generate more income?  This should be the first question every investor considers before making expenditure.
  4. Does upgrading have any other advantages? Will upgrading and modernizing a system have some cost savings that are beneficial such as lower utility bills (especially if landlord expense), lower insurance, or tax deductions?  If so then this could favor replacement.

50/50 Rule

Without knowing it I seem to have been operating under what will now be known as “The 50/50 rule”-   If the appliance or system has exceeded 50% of its expected life AND the cost to repair exceeds 50% of the replacement cost then I will opt to REPLACE the appliance or system.   Both of these criteria MUST be met in order for me to replace otherwise I will usually simply repair the unit.

Other Theories And Info

I’d be remiss if I didn’t mention a few other theories and info I found while researching for this post:

  • 33% rule – a rule that states any time the cost to repair exceeds 33% of the cost to replace then you should replace the system or appliance.  This theory does not consider the age of the unit.
  • Investors, like homeowners, can purchase home warranties that cover most appliances and systems in the property for anywhere from $400-$800 per year depending on the number of units in the property.  I’ve heard mixed reviews on these but lately the feedback as been all good.
  • Sometimes making an insurance claim might make sense depending on the cause of the damage and the deductible.

I’d really like to hear feedback from the BiggerPockets community (if you’re not too comatose from the Tryptophan) as to how you handle repairs and replacements.

HAPPY THANKSGIVING!

Photo: John Powell

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About Author

Frank L. DeFazio sells Philadelphia Real Estate and Philadelphia Condos for Prudential Fox & Roach in Center City Philadelphia. Frank is a real estate agent, investor, developer, and founder of the CenterCityTeam. Read more from Frank at his Philadelphia Real Estate Blog

12 Comments

  1. Hi Frank, the 50/50 rule is the better way to go. Dishwashers on the other hand cost more to fix than replace. Newer fixtures are more energy efficient and usually take up less space. Still can’t see how the insurance would save me any money as I do most of the repairs myself, average about $100 per property a year. Very good points you brought up.

  2. I like the 50/50 rule. As a buy and hold investor I tend to prefer the replace option as it will give me a long period of time to hopefully not have to worry about that system.

    One area I wanted to elaborate on is where you mentioned the energy efficient aspect. You mentioned the utilitiy espense especially if landlord pays. I think I like it even more when it is a tenant espense. If I can lower their utility cost from $100/m to $50/m, I can raise the rent $30/m and still give them a lower cost than before. My tenants have loved this and they are very greatful and that reputation has been invaluable to the smooth operation of my business.

  3. I like the 50/50 rule.
    I don’t mess with home warranties – too many times they don’t cover the needed repairs.
    Rarely do we turn anything into insurance – certainly nothing under $5000.

    Thanks for your article.

  4. I always, always purchase a 5 year warranty on the brand new washer and dryers that I provide within my 3-4 bedroom units. I catch deals on a washer + dryer at my local electronic store (PC Richard & Son here in the Northeast, if you wanna know) where I can pick them up for $500.00 a pair after rebate and then I pay an extra $90 on each for a 5 year warranty. Best investment I ever made because #1, some of my tenants (all Section 8) have flat out told me that they don’t wanna leave and having that brand new washer and dryer in their apartment is the reason why. When they stay, I make money because their $1,000.00-1,300/month apartment never becomes vacant. #2, when a dryer breaks down (and even the new ones often have problems sometimes) all I have to do is call the store and they handle it from there. Hands off management. When the 5 years on the warranty is up (or I’m done depreciating the appliance on my taxes), I sell each of them for $100 each and that will cover the purchase of the protection plan on the next set that I buy (wash, rinse, and repeat…no pun intended. Lol.). I used to use a major department store (SEARS) and buy their washer/dryers and get their protection plans, but I found that if I use a local, regional store, that I only have to call that store instead of having to call a call center in India or Bulgaria on top of having to wait weeks for the problem to get solved for the tenant. For my units with dishwashers, I replace as opposed to to repair, hands down. SearsOutlet.com is where I go exclusively and can often pick up a scratch and dent, full size dishwasher for $125-$150. No brainer to replace instead of repair with that kind of replacement cost.

  5. Thank you for rising this problem Frank. I am a newbie investor and just recently I got a call from my tenant that her washer is out of order. So I was thinking of either replacement or repair the applience. After reading your article I tent to replace it by searching the Craigslist or going to the Habitat and Hummanity store.
    Thank you again,
    Vladimir Borovskikh.

    • Vladimir, have you determined what is wrong with the washer? If it is a bad belt or even the drain pump it is usually a very inexpensive and easy do-it-yourself repair. I would recommemd to take some time to learn some of the basic operations as repairs on household systems. This will allow you to get a good cost basis on repairing many things yourself.

  6. Home warranties are worthless.

    I have had 3 and not once have the paid out. They always find a way to wiggle out of paying.

    For instance; I got a home warranty “for free” on the purchase of a property this year and it clearly states in the advertising brochure that I was given at closing that it covered automatic garage door openers. So the garage door opener dies a couple of months later and they refuse to replace it. Why? because they only honor the wording of the policy, not the 4 page detailed brochure – which a) we never got at closing and b) you cannot read until after you have purchased it!? The policy said it only covered garage doors, not openers. Talk about a bait and switch.

    So I tried again; this time with a clogged sewer line. So sorry – once the pipe go beyond the perimeter of the foundation it is not covered.

  7. Kevin Perk

    Frank,

    Nice article, thanks for the tips!

    Here are some thoughts I had.

    I have always had success with used appliances, especially washers, dryers and stoves. They are much cheaper than new appliances, come with a small warranty, seem to last a long time and when they do wear out I can usually sell it back to the store I bought if from so they can use it for parts. Plus they have a repair guy who works cheap since I buy a lot and it was their equipment.

    That said, I always buy new refrigerators, as my experience with used ones has been bad. When it is time to repair these, I usually find it makes sense to just replace. Same generally goes for dishwashers. I think your 50/50 rule holds up.

    One thing we have had recently is the unexpected cost of installing new HVAC equipment when something goes out on an old system. With the new freon unable to be used in the old equipment and the old freon getting more and more expensive, it just made sense to bite the bullet and replace the entire system.

    Thanks again for the article,

    Kevin

  8. Nice Post, Your appliance has decided to stop working correctly and you’re not sure what to do. Repair or Replace? You don’t want to waste money on an appliance repair service call charge if you don’t need to but you also don’t want to buy a brand new washer or dryer or refrigerator or dishwasher or any major household appliance if yours can be fixed for a reasonable price.

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