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Leasing mechanical equipment for rentals in AB ??

Discussion in 'Real Estate Discussion' started by Michel Lafleur, Jan 31, 2018.

  1. Michel Lafleur
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    Michel Lafleur Inspired Forum Member REIN Member

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    I am working on a building legal basement suite in Edmonton, and am fortunate to have some good tradesmen on my team. Discussing costs & potential savings with my HVAC & plumbing crews, they brought up the idea of leasing mechanical equipment (furnaces, hot water systems, etc.) instead of purchasing them up front.
    I've heard that leasing hot water tanks is quite common in Ontario, and I am curious what other member's experiences & opinions are on this.

    This project is intended to be a long term holding property, so needing to pay out a contract at the time of sale is not a concern for us. The furnaces are already ordered, but we are discussing options for hot water....

    Using this lease program, the total costs are ~ 5% cheaper than if we purchase the equipment with cash today, and they spread your payment out over 84 months. Looking at our monthly costs, the extra $30ish/month should have minimal effect on cash-flow.

    As part of this leasing plan they include the initial installation as well as any servicing/flush/maintenance etc. once per year - completed by a journeyman as part of the preventative maintenance. And if there are ever any issues, they include service calls as part of the 'warranty'.
    This sounds appealing as it will reduce our maintenance costs, and we can have the tenants contact the plumber directly if there's a leak or no hot water. This should also save us time & $$.

    Are other investors familiar with this type of lease program? If so, would you suggest looking into it, or do a traditional purchase and forget about the lease option?

    My understanding is that the monthly leasing costs are considered as a business expenses, and are thus tax deductible. Any insights on this?

    And lastly...with the idea of an annual maintenance included as well as service call, we are considering going to the tank-less on demand system. With the current government rebate ($1000), the tank-less system is actually cheaper than a 50 gal. tank. Im hesitant to go tank-less because Ive heard maintenance on these is tougher...but, if maintenance is included, should this be the way to go?

    Thanks in advance, your thoughts, insights & opinions are appreciated!
     
  2. Martin1968
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    Martin1968 Frequent Forum Member Registered

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    Morning Michel,

    The way you present it, leasing this way, would be a no brainer as opposed to immediate cash out of your pocket. Now, to be fair I have never done any type of lease construction for any of my rentals. However I have done numerous equipment leases in the past, wether it was 3 or 5 year terms. I have never seen any lease agreements being cheaper then cash purchases, you always pay more, so from that perspective it seems odd, but if you have done the math then by all means go for it.
    As far as tax deduction on lease as opposed to depreciation on cash purchase I think the difference is peanuts.
    What I have done in the past is short term 0% 1 year deffered or 18/24 monthly payments on capital expenses such as windows or roofs with major hardware stores. I like these type of deals as it doesn't cost me anything extra as opposed to immediate cash out of my pocket. I rather use that cash for DP on the next property.
    As far as tankless, that's an individual choice. I have chosen to not go for that.
    Cheers! hope this helps.
     
  3. alaas
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    alaas Frequent Forum Member REIN Member

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    Hello

    Which area of Alberta is this in? In Edmonton its much cheaper to purchase than to finance with a company such as Reliance. What prices ahem you been quoted for furnaces and hwt etc?

    Lisa
     
  4. Kim8508
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    Kim8508 London realtor,investor,renovator REIN Member

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    I’m a realtor and investor in London Ontario. Here, most,if not all, new built homes come with a hot water rental, unless a buyer requests to put in a bought one they pay for in the deal. Most home buyers of new builds don’t think about it, are use to it from their previous home, or don’t want to put out extra $1500+ depending on type purchased. Hence, most homes over the years have rented how water tanks.
    With my single family home rentals, I leave in the rented hot water tanks, as my leases require tenants to pay the rentals, thus no cash purchase outlay on my part. They are also covered for any breakdowns but not regular maintenance. Unfortunately, here, the gas company/leasing the tanks, won’t change the names over to the tenants, hence the lease stays in the owner/landlords name, and hence added costs need to be collected every quarter. As the tenants pay the rentals then it’s not an expense for tax expenses.
    In my student rentals, which are all inclusive( not ideal but that’s that market here), I got tired of paying $90 every quarter, $360 per year, so for $1000, I purchased medium efficient gas water tanks, with a 2.7 year pay off. Not much can go wrong with tanks these days...build up around the flame, maybe a valve if ones unlucky, so I just include a routine maintenance with my furnace to include the hot water tank. I also cap the utilities costs so any excessive usage, the students pay for, as per their lease. Makes them more efficient and they watch electrical usage/air conditioning use etc.
    In my multi family, triplexes, I switched out rentals to purchased electric hot water tanks, one per apt, as tenants pay hydro. I pay for water and gas due to configuration of heritage buildings plumbing.
    You mentioned no concern for payout as it’s a long term investment. Heads up, it’d be good due diligence on your part to know what an early payout could cost. I’ve had experiences with real estate clients who have leased their furnaces and air conditioning (a somewhat newer experience here over the past few years) and then have to sell. A few years into leasing, with hefty month payments, still required $10,000+ payouts of the lease ( no where near what it would’ve cost to buy), , and hence a lot of stress and less bottom line for them from the home sales. A few companies here in Ontario where being reviewed by Ontario government for these leases, which were from door to door sales (another animal) as they unfortunately seemed to prey on lower income areas. Don’t know of any positive outcome from that investigation. Comes down to buyer beware!
    Hope that gives you some insight from this side of the country.
     
  5. Michel Lafleur
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    Michel Lafleur Inspired Forum Member REIN Member

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    This property is in Edmonton, and the company is Reliance.
    One of the HVAC & Mechanical guys that I used to deal with switched to Reliance about 6 months back and speaks highly of their lease program.
    I have only looked at their offerings for hot water systems. I know they offer furnaces, AC, etc, but we have already purchased that equipment.
    We looked at a 50 Gal Powervent (high recovery) which was $29/mo. The high capacity tankless (Rinnai) system is $39/mo.
    Reliance is one of the government grant installers, so we will get the $1000 rebate if we go tankless.
    What appeals to me most is that they include annual maintenance and all service calls for the life of the lease (7 years.) As a buy & hold property, I value saving the time and costs for maintenance & repairs. Tankless looks to be a superior system, especially if all the common issues are taken care of (free of charge) through their maintenance & warranty program.

     
  6. Michel Lafleur
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    Michel Lafleur Inspired Forum Member REIN Member

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    Thanks for the input Kim. Its interesting to hear how things operate in ON compared to her in AB.

    As a Realtor her in AB I too have seen some of these leases needing to be bought out or transferred with the sale of a property. Its far less common here (than ON), and most of what I have seen is the scenario you mentioned - low income/hard times where they couldnt afford to purchase, so leased and needed to pay out more than a typical purchase cost when they go to sell the house.

    I have looked into the buy-out penalties. They seem reasonable, but would end up costing more than if you purchased it traditionally, especially if that buy out happens more towards the start of the lease.

    We are building this basement suite (will be a new suite in an older home) as a 10+ year holding property. We have already paid many costs up front with new plumbing, electrical, furnaces, windows, renovations etc. We want this to be built well from day 1 so that maintenance is easier the next 10 years, and so that we get better than average rents during that 10 year period.

    The tankless hot water on demand system is not common in rentals (at least not in AB) because of the typical installation costs, plus their reputation for being new & tedious to maintain/repair. @ 199,000 BTU tenants should never run out of hot water, and with the maintenance & repairs included, it should be hassle free.

    Leasing the tankless high capacity on demand system can save us some $$ up front, plus give us $1000 back. If we swap to another tank, we dont get the $1000 rebate. Same for a purchase - no rebate on tanks, only on the energy efficient tankless on demand systems.
    I also like the idea that they include 1 preventative maintenance service annually, and will cover any repairs/maintenance etc as part of the lease plan. Im hoping that will save us time & $$ down the road.

    We havent decided fully yet, but are leaning towards the tankless system with the lease plan. I thought I'd ask the REIN community what their experiences have been with leasing equipment, as well as where investors stand on the tank/tankless debate.

     
  7. Martin1968
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    Martin1968 Frequent Forum Member Registered

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    I can appreciate the fact that you want to build that basement suite and do it well. However, in order to attract above average rents, putting extra money into a high end furnace or hot water heater does not really ad to the WOW factor in my opinion and experience. (If you pay for Utilities yourself it could be).

    When you do the math you will be paying 84 x $29.00 is +$2500.00
    When you break it down, (appr. prices) I think the W.H. cost $900.00, the installation $300.00 and putting a price on 7 years once a year maintenance I would think the price of a service call @$100.00 per year. The total package is $1900.00. In a lease program (as stated before) you will make some extra payments. That's very normal practice. (I'm not saying it's bad, it's a choice) So you are paying a $600.00 premium to spread out the payments.

    Now, let's say you would just go with a decent quality 40 gallon w.h. I would put it at $500.00 value, add $300.00 install on top, and forego on prepaid maintenance. (I'm one of those guys that would never pay for pre paid maintenance plans or extended warranty but that's everyone's personal choice)
    So, in the second example it will cost you $800.00. The leasing program with higher end equipment and prepaid maintenance is going to cost you $2500.00
    Difference is $1700.00.

    You want to attract above average rents? Put that money towards nice stainless steel appliance, such as the ones with the convection oven, the bottom mount freezer, the stainless steel tub or put some extra detail into your bathroom. Or nice decent flooring. Always works. Expensive waterheater??? Not so much.

    Regards.
     

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