2million - My Journey to Financial Freedom

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Monday, September 11, 2006

Repair or Replace HVAC?

The house I purchased in June has a gas pack heating/cooling system that was installed around 1993. I had it inspected while I was purchasing the property and a rust hole was discovered in the heat exchanger. I tried to negotiate for a whole new system from the seller, but in the end settled for ~$1,500 which was based on a quote I received to replace the heat exchanger in the gas pack since the unit seemed to be running fine otherwise and I was happy with the price we had agreed to.

Well here it is a few months later and I am finally getting around to addressing this problem. I called the company who gave me the written estimate for $1,500 and (long story short) their new estimate is now $2,500 because the cost of the parts has jumped up.

I called around and got a new estimate from a different company for $2,000. However every company I have called has suggested I replace the entire system since the repair cost is so high.

Further research online suggests the average lifespan of HVAC systems is 14-18 years. I am not sure if that is industry marketing suggesting that these systems need to be replaced more frequently? I have talked to colleagues and one said he had a system last 21 yrs before he replaced it.

I got some quotes on new systems and they ranged from $4,700-$5,800 - way more than I really want to spend given my current cash crunch.

I don't see much advantage to buying a new HVAC system in term of heating/cooling costs; yes they are more efficient, but I will not be living in the house long enough to see much payback - I plan to rent the house out in the next 1-2 yrs. On the other hand, a new system reduces the chance that I will have to spend time on the HVAC system anytime in the future.

I looked into the energy efficiency tax credit and unfortunately the credits only apply to the upper-end HVAC systems and don't cover a significant portion of the increased price so I won't be taking advantage of them.

So I am struggling to figure out what makes the most sense financially. If I bought a new HVAC system, the cost could be added to the basis of the property and deprecated over a 30yr period when I rent the house out. If I just repaired the system, I would not be able to deprecate anything.

However, repairing the system has a much shorter payback period. If I repaired the system and it operated for the next 7 years, the new system would have to run at least 16.4+ years (assuming $4.7k cost for new) to reach the same level of payback.

Given my current cash crunch and the shorter payback period, I am going to just get the system repair for now. When financial decisions like this don't have a clear cut answer to the biggest benefit, I always end up going the route that requires the smaller cash outlay.

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