By: Hilary Thompson
Your HVAC system is one of those more significant components essential to the effective upkeep of your rental property. Older or inefficient heating and cooling systems turn away would-be renters or cost current ones too much on monthly utility bills. So, the condition of your heating and cooling system helps you set the right rental price and maximize your profit.
But your HVAC also impacts renter satisfaction. Units that don’t cool or heat adequately are at best annoying, and, at worst, a danger to the health of your tenants and their pets. Air quality affects many things. Even using a humidifier during the winter not only safeguards the structure of your property from needless wearing and drying (protecting those expensive hardwood floors), but it also creates a health benefit for your tenants that anyone would appreciate during the cold and flu season.
So, your HVAC system affects every aspect of your rental property. But before you replace that old furnace or air conditioner, consider whether it’s best to buy or rent them. Both have pros and cons and making the right choice will depend on your situation and goals.
Renting an HVAC System
Renting an HVAC system comes with many of the benefits of leasing or renting a car. Like a lease, it’s a long term commitment with the option to buy later. But there is less flexibility when it comes to what you can do with your system after it’s installed. Consider these aspects of HVAC rental when deciding.
Low Upfront Costs
When renting from an HVAC service provider, you agree to have the company install the system in your property at their expense. And monthly payments are manageable and spread out over the life of the system, usually between 10 and 15 years. There’s a little upfront cost for you — no $4K to $5K worth of equipment to purchase or contractor to hire. The rental company oversees installation.
Because renting is a lower monthly payment than financing, you’ll be able to lower your total rent per month. Or you can keep it the same and widen your profit margin. The low start-up cost also frees up cash for other projects. If you needed a new HVAC and a roof replacement, renting the heating and cooling system could get both projects done.
But there is one big financial downside to renting an HVAC system — you’ll spend much more in rent over the lifespan of the system than you would be by buying it outright. For example, a furnace that runs $4,000 to $5,000 range might cost you around $18,000 over its lifetime.
With HVAC rentals, you won’t have to worry about the costs for future repairs, maintenance, and replacements. Rental companies provided free or discounted labor and repair costs. When the company has deemed the system to have reached the end of its “useful life,” it will replace it — that is if you decide to renew the contract.
So, the trade-off here is in freedom choice. The rental company decides when a system has reached its “useful life.” It also chooses who maintains the unit. So, if you’re dissatisfied with the current service, there’s little recourse. For repairs and inspections of the equipment, the company gets access to your rental property anytime they want, which can turn some renters off to the idea. But free maintenance is also convenient for renters who live long distances from their property or who have little time to manage such things.
Rental Contracts are Transferable
If you sell the property, you can transfer the rental agreement to the buyers/investors on the same terms. Depending on your target buyer, this could be an incentive or a deterrent. For example, retirees may prefer the ease-of-use a rental contract brings. If so, buyers can then assume your rental payments. If they don't you'll have to keep paying the HVAC rental fees each month or pay the one-time-buyout price for the equipment.
Some HVAC service lessors allow tenants to take over your monthly rental payments. That means you can roll the cost into your own monthly property rental charges. But it’s best to make the HVAC rental payments yourself. Late payment charges can be steep and compound monthly. You don’t want your renters’ lapse in payment, costing you on late fees.
Buying an HVAC System
Buying an HVAC system outright is also a good solution for property owners who can afford it. But financing a system is much like buying one. It will cost you in the long run in interest charges. Whether you pay more in interest or rental premiums will depend on your interest rate, the length of the contract, and other factors. And you should check with a tax professional to see if you’re able to deduct interest paid or rental fees from your annual income tax. The answer might be an incentive to choose one over the other. Here are some pros and cons of buying an HVAC system.
The obvious advantage of a one-time payment is the long-term savings you get from no interest and rental fees. But that initial outlay of funds has an opportunity cost. You won’t have the capital for other improvements or for lowering your rent. These put you at a disadvantage in the competitive market for renters. But a one-time purchase comes with risks too. If you install a new system only to sell the property a year or two later, you'll be walking away from part of your investment. And if you finance, you’ll be paying interest every month without the benefits of free maintenance and updates that come with rental agreements. Many companies offer warranties and protection plans for parts and labor, but that’s an added cost.
Makes Selling Easier
Because there are no contract transfers as with rentals, selling your property is easier. Your market for potential buyers opens up. House hunters won't balk at a monthly rental agreement they'll need to assume. If this is the case, you’ll need to add the cost of buying out the HVAC equipment to the selling price of your property. This raises the asking price. So, HVAC rentals can be a negative selling point.
More Maintenance and Service Flexibility
When the HVAC equipment is yours, you get to choose who services it and who doesn’t. With a rental agreement, there’s little you can do. Freedom to choose helps you find a local heating and air companies that may be less expensive and more convenient to work with. If you have friends or family who are HVAC certified technicians, or you own a heating and air business yourself, then free maintenance isn’t much of a selling point for renting. Plus, rental companies have contractual power to enter your property to inspect, service, and replace equipment. If the equipment is yours, you don’t have to agree to this.
Whether you buy or rent an HVAC system really depends on what you prioritize — time or money. If you want a hassle-free experience that costs more in the long run, then renting may be the answer. But if you’ve got the cash and don’t mind dealing with upkeep, scheduling, and maintenance, then buying outright makes more sense. Either way, you need good heating, ventilation, and air conditioning unit to maintain a healthy tenant-landlord relationship. Without it, you won’t have money coming in to pay for an HVAC at all.