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:
- 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
- Age of system – if the system has reached or exceeded its life expectancy than this favors replacement.
- Will repair generate more income? This should be the first question every investor considers before making expenditure.
- 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.
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.
Photo: John Powell