AC Replacement Deferred: We Gambled And Lost

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A new AC system costs how much?!?

Just over a year ago we had a heck of a weekend with one of our rental units. On a Sunday afternoon, our Renter called us up and told us: The AC isn’t working. Oh, yeah. And the washer hasn’t been working for the last month either.

Really, Renter? You couldn’t have told us when this first started? How 21-year-old boys can go weeks without feeling the urgent need for a clothes washer is more than slightly gross. But I digress.

Long story short, we replaced the AC unit ($3350) and the washer ($400) all in one swoop a year ago, and it stung a bit. In fact, it stung enough that when the AC repair company offered us the opportunity to replace the other AC unit in the duplex (which was of a similar vintage, though slightly better condition) at a 10% discount, we hesitated. And, as I am so often inclined to do, we did some math.

Our calculations went something like this. If an AC unit lasts 10-15 years, how much longer would this system have to last to recoup the $335 (10% savings)? Let’s assume it lasts 12.5 years. Then straight-line depreciation gives us a cost of $3350/12.5yrs = $268/year.

So, to recoup the $335 (10% savings), we were betting that the system was going to last $335/$268/yr = 1.25 years (15 months).

 

We Rolled The AC Dice

We were betting on 15+ more months of service out of the system. Well, 12 months later, the AC system broke. Crud. We lost 3 months on our break-even point. That’s not so bad, right?

Well, not quite. In fact, if I were writing a post based on being off of break-even by 3 months that might feel a little cheap/petty, even for me.

The kicker came when we went to get estimates for a replacement system this go around.

 

The Price Went Up Significantly

We had not factored this possibility into the equation at all. Typically, as technology ages, the price decreases. Heck, everyone knows that you can buy last year’s iPad for $100 less than this year’s iPad. But apparently, we hit a unique period in time when AC unit inflation was significantly higher than normal. And by that we mean that the manufacturer’s price for these systems went up. By $350. Across the board.

That means that AC unit inflation was a whopping 10.4% in 2012. Which stinks.

We tried to find price matching on the system we had installed last year, but to no avail. All of the quotes came within $50 of one another, so we went with an installer that we have used and trusted in the past.

 

Needless To Say, We Should Have Done It Last Year

We got about $268 worth of value out of squeezing one more year out of the AC system, but at the cost of losing the 10% discount ($335), and finding ourselves facing that 10.4% price increase ($350).

So I’m going to call our net loss on this gamble a solid $417. Crud.

Hindsight is 20/20 on this one, and although we did have the money in our emergency fund last year to take care of both systems at once, we also had a decent chunk of non-mortgage debt that was hanging over us at the time, too, which played a role in us deferring this AC replacement. The debt was, to recap:

  • Our $38K HELOC – paid off completely in January
  • $8.6K car loan – paid off in February
  • $50K loan to Mr. PoP’s parents that we used to buy the duplex… still on schedule to pay this back in August, albeit a little tighter after this almost $4K hit

Had all of that debt not been there, we probably would have made the more optimal decision thinking the breakeven was close enough that it was worth saving the hassle to get it all done at once.

 

So the big lesson of today is this:

Debt can cause suboptimal decision making.

Shocking, I know. But hey, sometimes the simplest lessons bear repeating once in a while.

 

When has debt played a role in your decision making? What kind of sub-optimal decisions did you make that would have been different were it not for your debt?

31 comments to AC Replacement Deferred: We Gambled And Lost

  • If you find the laundry gross, my tenants didn’t warn me that the water boiler was broken for a week this winter, so they either went with cold shower or didn’t shower at all! And it was around Christmas so it took an additional 4 days to get the repair team there.
    Pauline recently posted..Friday recap, back home and a winner!My Profile

  • “Debt can cause suboptimal decision making.”

    Now you’ve got me thinking. The thought that is going through my head is this: How would my decisions change in varying money situations. What if I had 200K in debt and lived in an apartment? What if I had $2,000,000 in the bank and no debt?

    I think the correct answer is that I’d live the same. However, if you had the big money, you could take more chances; be more of an entrepreneur (my real goal).

    But I digress. This is a good post, but I don’t think you should worry too much about it. Like you said, the trend is for most things to get cheaper over time, not more expensive. I probably would have waited too.

    The other thought that comes to mind is with something like an AC unit or an appliance, you never know how long it’s going to last. The AC unit on my last home was 30 years old and still worked fine.
    Mr. 1500 recently posted..Thursday Rant: Mrs. 1500′s Quick HitsMy Profile

  • I really like the math you guys did to help your decision. But I don’t think the fact that the AC broke early made it the wrong decision. Whether you had the debt or not, you would have faced the same math at the time and you really could have gone either way. You chose a reasonable path and it didn’t exactly work out, but that doesn’t mean the decision itself was wrong. I guess I just don’t you can analyze decisions based on an outcome that was affected by many factors you couldn’t control or know ahead of time. In other words, don’t beat yourself up. This stuff happens.
    Matt Becker recently posted..How Important is an Emergency Fund?My Profile

    • True – the math could have gone either way.

      Knowing us, and how exhausted we were after rebuilding our cash buffer last winter (we had pretty much emptied it when we bought our lot), we knew we wanted to focus on debt. But if the debt hadn’t been there, we’re lazy enough that we probably would have done it.

  • I still like the original decision. The math was sound, the risk wasn’t too great. Just bad luck. And what in the world is “AC unit inflation”? Are you telling me I missed the wave to buy and hoard a bunch of A/C units in my garage instead of dumping more money in my 401k? Bummer.

    We made a lot of sub-optimal decisions during our debt days, but we somehow skated through mostly unscathed. I think our bodies probably hated us the most during that of stage of “how-many-items-can-we-buy-on-the-Value-Menu-with-five-dollars-AND-without-going-into-cardiac-arrest.” We can still do a better job in this department since quality foods tend to drive a high price.
    Johnny @ Our Freaking Budget recently posted..OFB 50 States Project: TexasMy Profile

    • You don’t like my made up term “AC unit inflation”? =) If it’s any consolation that you didn’t hoard AC units, an SP500 ETF would have had a much better return over the same period. So your 401K is probably all the better for your non-hoarding.

  • I would have done the same thing. You had math on your side, but luck is always the one that blindsides you. Now, I don’t know about AC unit inflation, but I am assuming that it comes around only during the warmer months of the year. that is just my guess.
    Grayson @ Debt RoundUp recently posted..What Not To Do: Leave Money On The TableMy Profile

    • The discounts may be seasonal, but this is a may 2012 to may 2013 comparison, so I think any seasonal effects are accounted for and this is just a plain old price increase. And given how many suppliers stuck to it and couldn’t match our price from last year, I tend to believe that the increase came from the manufacturers…

  • Ugh! I hate when stuff breaks down. Especially when it has to come out of your pocket. We are lucky in the fact that we are responsible for the washer and dryer in our rental house with the tenants. They have to take care of that themselves. I hope it works out
    Debt and the Girl recently posted..Call Me Crazy But…My Profile

    • It will work out, no doubt. We had already accounted for the fact that in 2013-2014, we were probably going to have to replace this AC unit as well as put a new roof on the duplex, it’s just never a fun bill to pay no matter how much you plan for it. =(
      Do you think your rental is a tougher sell if it doesn’t come with washer/dryer? We know that’s part of why our college kids like our place!

  • I’ve delayed medical appointments (not an annual physical, it was a check up of suspicious moles) during my student loan repayment years, and I do not advise anyone to do what I did. Fortunately, everything turned out okay, but having worked at a healthcare clinic for over 3 years, I’ve seen the negative impact of delayed visits to the doctor. :(
    Tina @My Shiny Pennies recently posted..How Much Does Your Job Cost?My Profile

  • I think you still made a good decision based on what you knew at the time, and I probably would have done the same thing. “Luck” is rarely ever on our side: I remember our heater went one winter, and the next summer it was the AC. Those expenses were crippling for my parents, but going without either wasn’t an option for them so they got new units. At least it was a decent selling point for the house, as I’m sure that’s a concern a lot of homeowners have.

    Being in debt and trying to save as much as possible has kind of put a damper on food – I don’t purchase enough of it or I just get unhealthy food which is obviously not ideal, but as you said, sub-optimal decision making!
    (BTW, Kitty PoP is adorable.)
    E.M. recently posted..The Mindset of SavingMy Profile

    • unheathy food is definitely sub-optimal. Do you have the time to cook from scratch? It can be nearly as cost effective, but much better for you. I’m trying to learn more from scratch cooking, but it seems to take so much time!

      Thanks for the compliments on Kitty PoP, we think he’s pretty cute, too!

  • Karen

    What’s the capacity of the a/c unit? I’ve been thinking a new one would cost around 5k. No reason other than I expect high prices around here and especially on something as necessary as a/c!

    I think I would have had gone for both mainly because I’m becoming more pessimistic. Also, I think the prices of major appliances aren’t going down. I recall being able to purchase a cheap washer for around $300 a few years back and now, I don’t think you can.

    I like that you “do the math” to make decisions.

    Re: Mr 1500 with the 30 year unit. That’s because things that old were made better/to last. :)

    • The ones in the duplex are 13 SEER, 2 ton units. Not the most energy efficient, but a definite improvement over what they’ve currently got.

      We got a new AC unit in our house in May 2010 (wow, just realized this means we’ve purchased an AC unit in May 2010, 2012, and now 2013), and it was in the $6K range, I think? But then we got an energy efficiency tax rebate that brought the net price down to $5K or so. That one is a 16 SEER, I think – but I think similar capacity.

      • Karen

        I’ll probably get something not super efficient for the rental in the other state. Depends on how much they cost out there. But then again, the rent hasn’t increased in 5 years so I’m not necessarily concerned about being more generous. Ha.

        When the washer died, I was encouraged not to replace it. Apparently, it’s more typical for tenants to have/want their own in KY.

  • I agree with the others who noted that your logic was sound, even if the gamble didn’t pay off. Sorry to have to shell out a bit more money, but I think it was worth the risk.
    Done by Forty recently posted..May Net Worth UpdateMy Profile

  • Well it sounds like you rolled the dice and you lost, but if you were in the same position today, wouldn’t you do the same thing? I think I would. But at least you only rolled the dice after doing a detailed financial analysis.
    CashRebel recently posted..I’m Obsessed With Saving EnergyMy Profile

    • Same position TODAY? With payoff of our $50K loan so close? You’re right, we’d probably do the same thing. But 6 months from now when that payoff is done and our emergency buffer is nice and healthy again, I’d be tempted to apply for all the new credit cards that we could to max out credit card sign up bonuses with that $6K+ in spending and then pay it all off immediately. =)

  • trudy

    AC units are major contributors to pollution, that’s why changes are being phased in and cost money.

    I wouldn’t have gone for the 10% option either. I don’t like to spend money until I have to, and who knows how long something will last. Mine went on the fritz last summer, but the AC guy was able to fix it, even though it’s old.

  • A/C units are bloody expensive. We bought ours 2 years ago now and hopefully won’t have to worry about it for a while. When we bought our home we had our roof replaced and although we went with many quotes we took the company that was in the middle. We thought we did our homework but the next year there was no more company. So much for the warranty on the roof I guess. If we would have just said sod it and paid a bit more to go with a well established company we might still have a warranty. Granted the roof is perfectly fine, we learned our lesson to pay a few more bucks to go with the guy who’s been in business for many years. Sad to say but when this kind of stuff happens it’s hard to put faith in the new guys.
    Canadian Budget Binder recently posted..5 Ingredients: Simple Peanut Butter Chocolate Chip CookiesMy Profile

  • […] PoP hit (yay for commission sales!) and went out with a budget buster (though the expense for that new AC system won’t technically be billed until this week – the first week of […]

  • […] for Investment Properties: $4,071 – can we say “ugh!” to paying for the new AC at the duplex AND the flood insurance for the HELOC all at […]

  • […] for all expenses associated with repairs, maintenance, and advertising. Capital expenditures like a new AC unit need to be depreciated over time, but those big bills usually come directly to me so I don’t […]

  • […] properties was about where we thought it would since we assumed there was a good chance the AC would need to be replaced in […]

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