Rental Equipment - buy out or continue to rent?

[Nir]

Hi,
A new property I purchased has a 13 yrs old hot water tank and 13 yrs old special equipment to convert oil to gas which is connected to the furnace. Both are rented by the same company - "Reliance".

A couple questions on the topic:

1. Hot water tank: due to the water tank`s age Reliance is willing to sell it to me for $150 only. Would you buy out the old hot water tank
in order to avoid the monthly rent (but also not have service which is included in the rent)?

2. Oil to gas conversion: Reliance explained to me that due to the fact the oil to gas converter is "unique" equipment no longer being sold or serviced, they can NOT sell it to me. Does it make sense? they rent it for $30 a month! it looks like an old and dusty small piece of equipment connected to the old furnace. Would you continue renting it for $30 a month because "no one else can service this equipment" or would you try to do something about it in order to avoid paying $30 every month?

THANKS.

PS. I posted the question once before. it`s just there was no answer initially. I do admit it`s a minor question/issue that might not interest many

 

[Karma]

It depends . . . if you install new equipment you can claim CCA of 20% for 5 yrs. but if it is rental you can claim the full amount so you have to figure which is more advantageous. I have enough CCA so I`m going for renting the equip. since this can take me into a loss situation for tax purposes against other income while it is my understanding that CCA cannot be used to take you into a loss for tax purposes.

S.G.


QUOTE (investmart @ Dec 11 2008, 02:56 PM) Hi,
A new property I purchased has a 13 yrs old hot water tank and 13 yrs old special equipment to convert oil to gas which is connected to the furnace. Both are rented by the same company - "Reliance".

A couple questions on the topic:

1. Hot water tank: due to the water tank`s age Reliance is willing to sell it to me for $150 only. Would you buy out the old hot water tank
in order to avoid the monthly rent (but also not have service which is included in the rent)?

2. Oil to gas conversion: Reliance explained to me that due to the fact the oil to gas converter is "unique" equipment no longer being sold or serviced, they can NOT sell it to me. Does it make sense? they rent it for $30 a month! it looks like an old and dusty small piece of equipment connected to the old furnace. Would you continue renting it for $30 a month because "no one else can service this equipment" or would you try to do something about it in order to avoid paying $30 every month?

THANKS.

PS. I posted the question once before. it`s just there was no answer initially. I do admit it`s a minor question/issue that might not interest many

 

[Nir]

Interesting analysis S.G.

I haven`t thought about it from a tax savings perspective.

It just doesn`t make sense to me to rent it for like $200 a year when you can buy it for $150! and while it might require some service along the way I can always choose to buy a new one (not mentioning I can easily imagine the hot water tank not requiring much service at all for another 10 years based on average tank’s life).

So it`s a pretty simple math and risk benefit calculation but was just wondering if others agree with this basic cost savings approach or have any comments before I call the company in like 2 days to tell them the party is over.

Thanks,
Neil

 

[Dan_Eisenhauer]

One correction to Karma`s post. CCA is 20% declining balance and theoretically, can go on forever. It is not a straight line depreciation of 20% per year.

You also need to factor in the cost of replacing your hot water heater every 10 to 15 years.

It would take too long to describe how to do a present value analysis of this question. But, if you know how to do one, that would give you your answer.

However, in a nut shell, figure out the present value of each annual expense item for both scenarios over a given time span, probably one economic life span of the heater. Total the PV for each expense item. The column with the lower PV is the better value.

BTW: You also need to factor in the tax savings PV of each option as income, not an expense.

 

[Nir]

Hi Dan, thanks for the insight.

Yes, the PV comparison is the correct approach. it required estimating the repair costs for which you do not have to pay while renting in addition to “set up” costs.. based on a quick calculation the expected expense before considering any tax implication is half when owning.

Another way to answer the question is through logic/common sense - due to the fact the rental companies have to make money it must be more expensive to rent - you have to pay for their profit in addition to regular costs. another proof is the minimization of risk - when renting you limit the risk by knowing exactly how much you will pay even if there are issues (maintained by the company as part of the service). This risk minimization comes with a price – the monthly rent which includes “buffer”.

In economics you have to pay to minimize risk.


Cheers,
Neil

 

[markl]

Hi Neil,

My other thought would be to the inefficiencies of the old equipment. Generally they replace hot water tanks every 10 years. Furnaces if serviced 25 years.

They have very good incentives now for you to get an on demand water heater that will save you more in the long run.

Just a thought

Regards,

 

[Nir]

Great Point Mark,

By "they have very good incentives.." you mean places like Rona, Home depot etc.., NOT "Reliance", right?

Neil