Renting vs Owning Hardware: Things to Consider

HalfEatenPie

The Irrational One
Retired Staff
Howdy folks!

HalfEatenPie here with another article! This time the comparison and things to consider between renting and owning your server hardware! We’re going to cover the common features, the costs, and at the very end discuss the taxes. This article was mostly geared towards individuals who have little to no knowledge on this subject. Let's jump in.

Table of Contents

  • Definitions
  • Features
  • Pricing
  • Taxes
  • Summary
Definitions
When you're deciding between renting and owning your hardware, there's a ton of things to consider. As a rule of thumb, renting will generally save you headaches and time but will end up costing you more. Co-locating will save you more money long-term, but you'll be without some safety nets and services that makes your life easier. But first, let’s discuss the definition of "renting" and "owning".

Renting is universally understood as payments to a provider for the use of their hardware and network. Simply for the purpose of this article, owning is described as the purchase of the hardware and payments to a provider for co-location of the hardware, electricity to power the hardware, and network access.

Features

When renting, you’re frequently offered additional services for free such as speedy hardware replacements and OS Reinstalls (to a limit). When owning, you’ll have to consider availability of spare hardware, cost of remote technician services (commonly referred to as remote hand), and cost of electricity.

When co-locating, most providers will not keep spare hardware available on-site for you to purchase and use at any time. Therefore it’s best to keep at least some spare parts with your provider in case you need a quick hardware replacement to avoid extended downtime.

In addition, if you’re not available physically to troubleshoot your hardware problems then you’ll have to pay for remote hand to fix your server. However, this can be very costly as they commonly charge in increments. For example, a datacenter I am in charges 30 dollars every 15 minutes interval. As a side note, 30 dollars for every 15 minutes is considered incredibly cheap for remote hand costs. Know how much they’ll charge you for remote hand head of time in order to avoid unforeseen costs.

Since the provider can’t manage electricity usage on co-located hardware, you’re charged monthly per expected usage. These are commonly expressed in the form of Ampere. Depending on the voltage of electricity available at the datacenter, your ampere usage will vary. Recall from basic Electrical Engineering class P=IV, or power (unit in watts) is equal to current (ampere) times voltage (volts). Therefore 4 amps at 120 volts is 480 watts supplied to your server. The actual usage of electricity will fluctuate depending on your server usage, however for co-locations you’re commonly charged at expected usage.

Pricing

When we structure everything into numbers and costs, we can see a numerical difference between renting and owning hardware. Again, as a rule of thumb, owned hardware is much cheaper long-term. To make it easier to show the difference, we’ll investigate a simple case-study scenario.

Note: You can find cheaper pricing than those shown here, however these numbers are real market priced quote I received from a provider that is used simply for demonstration purposes.

Say we’re in the market for a new dedicated server with the following specs.

Rental quote I received stated a monthly fee of 200 dollars with a 300 dollar setup charge.

The co-location quote I received from the same provider stated a monthly fee of 50 dollars a month (Promotion Price, normally around 90 dollars).

For purchasing the server hardware, I went onto a site of a popular server building and financing company and estimated the costs of a server of a similar specs.

The server hardware itself costs around 1,080 dollars new and built. But wait! Remember you also have to pay for shipping.

Assuming the cheapest shipping was selected, the estimated total for server purchase and shipping comes down to 1,115.43 dollars.

Now I’m no finance or business major, but many of the engineering projects I've worked on utilize a cash flow diagram to easily show financial information. Below is a semi-complete cash flow diagram (semi-complete because everything doesn’t equal to zero… and the lines aren't exactly to scale) for a simulation period of three years and assumes all monthly server payments are made at the end of the year.

The cash flow diagram is pretty basic, but the idea it convey is there. Over an extended period of time, you pay less by owning your hardware. The following image summarizes pricing:

Now you may say “But wait, what about remote hand costs and spare hardware costs?” The warranty provided by the hardware provider comes with a 3 years warranty. Therefore, this scenario assumes there will be no hardware failures which will require a hardware replacement nor remote hand time to fix this issue. However, in the case it does, remote hand is priced at 75 dollars every 30 minutes during business hours (250 dollars every 1 hour during holidays and non-business hours). Even by adding the cost of the hardware itself, the total will be nowhere near as bad as one for the rented hardware.

Taxes

Please note I am not a lawyer or a tax auditor.

Certain counties or states in the United States have adopted taxation of co-located hardware, sometimes referred to as Personal Property Tax. Rented servers are taxed by the hosting provider, however for co-located servers only the cost for the colocation is taxed. Therefore, these Personal Property Taxes are sometimes used to tax the use of co-located server hardware from businesses and individuals. The purpose of mentioning taxes is simply as a word of caution and to research where you co-locate your hardware.

In Dallas County, Texas, the tax rate for equipment is 2.999% (Last numbers I could find, from 2006) of the total valuation of the hardware, new or not, for a five year depreciation schedule with 5% for the life past initial deprecation. For Dallas County, even used hardware (that have been newly co-located) are taxed. To determine the market value of these used hardware, Dallas County requests a value known as a “Good Faith Estimate of Market Value”. This is defined as:

So recall from the server example above, the cost of the hardware brand new was 1,080 dollars. At a 2.999% tax, the yearly tax on the server becomes 32.38 dollars. Still cheaper than going rented.

Summary

However you go about it, over a period of three years use you can save more than 60% of the total cost by going with owned hardware. But if you value a simple and easy way to just “get a server working and not have to deal with the paperwork/hardware/etc.”, then rented is the way to go.

Sources

Texas Property Tax

- Munzy

- http://www.window.state.tx.us/taxinfo/taxpubs/tx96_259.pdf

- http://www.window.state.tx.us/taxinfo/taxforms/50-144.pdf

- http://www.webhostingtalk.com/showthread.php?t=513111
 
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zomgmike

Member
Verified Provider
Rental quote I received stated a monthly fee of 200 dollars with a 300 dollar setup charge.

The co-location quote I received from the same provider stated a monthly fee of 50 dollars a month (Promotion Price, normally around 90 dollars).
I do realize it's just an off-the-cuff example and you even noted it as just an example, but I've got to comment.  That's a higher-mid-range quote for the dedicated server (holy setup fee, batman!) and a pretty stelllar price for the colo (especially if it comes with free rack/derack.)  Not that it undermines your post, but I think the break-even point with more "normal" prices would probably be closer to two years.  Colo would still probably take the lead in year three as the better deal, assuming that the dedicated server price hadn't dropped (though they usually do.)

Also not a tax lawyer, but I believe the full amount of leased goods (dedicated server rentals) can be deducted as an expense.

Great article, I'd definitely recommend the read to others.  You did a great job spelling out the thought process that a lot of people overlook.  I like how you went to the effort of making images and citing sources, that was a nice touch.
 

William

pr0
Verified Provider
That rent pricing is not realistic, if ypu divide the server cost by 12 it comes out at around 100$+colo at 50$ (at most) - Total rental cost should be less than 150$ thus. 200$ and in special that 300$ setup are EXTREMELY overpriced for such an E3 machine.
 

AnthonySmith

New Member
Verified Provider
That server rented I would (and do) pay less than $200 for, to be specific with conversion I pay $52 p/month for making the 3 year total $1872 wo that is quite a different picture, I appreciate I get a great rate on that but even if I double it (probably a more common price) to $104 p/m that brings it in at $3744 making rented $828.57 more expensive.

personally I would be happy to pay the extra $828.57 or $23.01 p/month to make replacing any hardware someone else's responsibility.

That said this is really well written, I appreciate they are pie in the sky numbers to some degree as no 2 DC's are the same so short of doing the same thing for every DC you wont get a completely accurate picture, good guide for people.
 

HalfEatenPie

The Irrational One
Retired Staff
zomgmike, William, and AnthonySmith.

Haha yeah I totally get where you're coming from with the rental cost of the E3. I originally was thinking more of new hardware colo for the provider, so the provided needed a ROI and all that. In addition, this quote was definitely from a provider with higher margins on Renting (definitely not a budget provider as well) so I guess I missed saying this but it was more supposed to accent the benefits that come with Rented hardware (this comes with within 10 minutes response time and whatnot). Again, they are an actual quote I received and I went with it however I guess I could do one for a budget provider as well.

Dacentec sells a E3-1230v2 with the exact same specs (on RTO but we're going to ignore that part) for 90 dollars. Colocation is around 40 dollars. So with the 50 dollars going to hardware (and assuming everything's new), it'd take around 22 months for the break-even point. So I guess my numbers had the break-even point happen much MUCH earlier than it is for some of the other providers, and for that I do apologize.

I do realize it's just an off-the-cuff example and you even noted it as just an example, but I've got to comment.  That's a higher-mid-range quote for the dedicated server (holy setup fee, batman!) and a pretty stelllar price for the colo (especially if it comes with free rack/derack.)  Not that it undermines your post, but I think the break-even point with more "normal" prices would probably be closer to two years.  Colo would still probably take the lead in year three as the better deal, assuming that the dedicated server price hadn't dropped (though they usually do.)
Haha yeah I guess I was just a bit too used to free racking service that I kinda blanked to mention it. I also forgot the entire deracking costs (e.g. Dacentec does 50 dollars charge for deracking and packaging a server and waiting for UPS to show up) and issues that comes with it. Totally reasonable comments you've given, not to worry.

Also not a tax lawyer, but I believe the full amount of leased goods (dedicated server rentals) can be deducted as an expense.

Great article, I'd definitely recommend the read to others.  You did a great job spelling out the thought process that a lot of people overlook.  I like how you went to the effort of making images and citing sources, that was a nice touch.
Great to know. I didn't want to be firm with the taxes part because of how diverse each country is in their tax laws. Mostly was an indirectly direct way of saying "make sure you read the local tax information, it'll save you from getting an unexpected invoice". Also thanks!

That rent pricing is not realistic, if ypu divide the server cost by 12 it comes out at around 100$+colo at 50$ (at most) - Total rental cost should be less than 150$ thus. 200$ and in special that 300$ setup are EXTREMELY overpriced for such an E3 machine.
Yep. I guess I should have found some better quotes and had it even out by the second year. My apologies.

That server rented I would (and do) pay less than $200 for, to be specific with conversion I pay $52 p/month for making the 3 year total $1872 wo that is quite a different picture, I appreciate I get a great rate on that but even if I double it (probably a more common price) to $104 p/m that brings it in at $3744 making rented $828.57 more expensive.

personally I would be happy to pay the extra $828.57 or $23.01 p/month to make replacing any hardware someone else's responsibility.

That said this is really well written, I appreciate they are pie in the sky numbers to some degree as no 2 DC's are the same so short of doing the same thing for every DC you wont get a completely accurate picture, good guide for people.
Yep, it's a major convenience to have the hardware rented, but then again you're expecting the provider to maintain stock even during possible shortages (e.g. 20 people all asking for a specific part replacement) which could be a bit unnerving for some. Personally, I'm stuck in between. On one hand if I'm paying a certain amount for renting, wouldn't it be nice to just own the hardware so once the contract/agreement is done you're still left with a valuable good? But on the other, the peace of mind and not having to deal with so much "crap" and worry about so much can be a life saver... from the stress.
 
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GS-Dylan

Member
Great article, helped me alot as I'm looking into owning hardware. I just bought my first server and this is my first experience colocating so I'm going to see how it goes. Got the server for a steal, and a great rate on the colo so I'm excited.
 

splitice

Just a little bit crazy...
Verified Provider
A lot of companies do really good rental deals, yet by comparison quite expensive colocation pricing (often even more expensive than their bottom of the line rentals). Now I can guess a few reasons why, but it is definitely worth considering.

Of course if you are buying more than 1U co-location it usually works out very good.
 

HalfEatenPie

The Irrational One
Retired Staff
A lot of companies do really good rental deals, yet by comparison quite expensive co-location pricing (often even more expensive than their bottom of the line rentals). Now I can guess a few reasons why, but it is definitely worth considering.

Of course if you are buying more than 1U co-location it usually works out very good.
Yeah. That depends mostly on the company's focus actually. If they don't want to support Renting unless they really have to, they'll have renting costs high whereas have co-location costs cheaper. If they don't want to deal with co-location as much and have a more "standardized" line without too many random parts here and there, they go with cheaper renting but lower costs for co-location.
 

mikeyur

New Member
Verified Provider
Great write up :) I've only recently colocated my first couple servers and it's definitely a learning experience. I think there's a sweet spot you need to calculate for rented vs owned and it depends a lot on the server specs, location, etc.

As an example, it makes zero sense to purchase a L5420 box with a couple drives for even $200, when it's going to cost you $40-50+/mo to colo in the states (could be more based on power pricing). When you can rent that box from Dacentec, Delimiter, Quickpacket and others for $40-50/mo and have hardware covered (especially helpful with older hardware).

At the other end of the spectrum, you've got E5 v3 boxes with 128GB ram and 1TB SSDs which would cost $5k to purchase and another $200/mo to colo with gigabit or 10GigE uplink - and you've got Incero renting them for $200-300/mo on promo, sometimes with a small setup fee.

I've put about $1k into an E3 box (similar to the one you mentioned) with 4x2TB WD RE drives, colo'd with Incero for $40/mo on their last promo. $1k + $500/yr for colo.. most places wouldn't rent that for <$120-150/mo on a solid deal. Year 1 I'm basically break-even, year 2 and 3, with a couple hundred set aside for 'insurance' (drive/ram replacement, etc), I'm still ahead and I have room to update that config, etc.

There's always a case to be made for renting since none of the liability falls on you, but there can also be less.. security(?) in it. I use this box for personal stuff - backups, RDP, hosting internal company stuff, etc. Worst case I can get it taken out of the rack and moved to another provider. The cost savings long term, even with the risk of it esploding and cost of replacing failed drives, are worth it to me in this example. I plan on keeping this thing until it croaks which could be 2, 3, 5 years or more, who knows?
 

HalfEatenPie

The Irrational One
Retired Staff
Oh yeah @mikeyur. The biggest limitation on those L5420 boxes is the power consumption. The power consumption in those babies aren't cheap so unless you get cheap power more than likely you won't be using them long-term.

I've seen some people say "If I'm going to pay 50 dollars a month to colo vs 50 dollars a month to rent, I'd rather pay the 50 dollars a month to colo so I still have the hardware after I'm done." While the logic itself may sound fine, the problem is the devaluation of the hardware over time. Now, as a guy guilty of this (because I do have a colocated Dual L5420 that's priced on par with a rented server in another datacenter ;) ) I prefer that approach since I know I actually own it.

Yep, colocation is similar to renting. You're paying for the space and the resources you use, not the hardware, which is lovely to keep your maintenance costs low for the newest fastest best hardware. Not as lovely if you're using outdated old hardware where someone already has received their ROI on.

Yep. While liability wise renting is great, if the provider sells out or simply doesn't want to renew your service, then you're essentially forced to move out and reconfigure a new server. However if you own the hardware, then you can simply move the physical server to another location and continue as planned (less work for you and less downtime). It's honestly a pro vs con game for each option.

Even if the hardware is old I haven't seen too many problems ;) My old desktop ran for like 6 years before the on-board video was fried. By then I could have simply purchased a video card, but instead decided to simply build a new computer. Assuming you regularly maintain your hardware, I see no reason why it shouldn't last a long time!
 

RLT

Active Member
then you can simply move the physical server to another location and continue as planned (less work for you and less downtime


This is dependent on proximity to the data centers. If you're depending on them to derack and ship it's debatable.


Plus I think we all remember the recent Volume Drive and Burst fiascoes.
 

key900

New Member
Verified Provider
then you can simply move the physical server to another location and continue as planned (less work for you and less downtime


This is dependent on proximity to the data centers. If you're depending on them to derack and ship it's debatable.


Plus I think we all remember the recent Volume Drive and Burst fiascoes.
You are right in this after Volumedrive left their servers and client data.
 

TurnkeyInternet

Active Member
Verified Provider
one additional point on taxes , from a different angle.  In the US, tax code has changed on the amount and timeline you can write off tangible equipment (Assets).  In the past (previous year included, but not this year) you could write off $250k or more depending on type / use of your computer equipment that you would then use (colocate or otherwise). 

As of the start of this year, that $250k 'cap' on complete equipment write offs in the year was decreased to a ridiculously low $25k (1/10th the amount) or roughly 1 or 2 beefy servers!  Anything you spend on equipment over that has to go on multi-year depreciation cycles (meaning you are in effect paying tax on equipment you buy as profits for your business, and slowly over say 5 years get the value back from the tax man -  even though you needed the equipment to just run your business today they in effect make you pay profit/taxes on it now in full and slowly recoup over time which is bad for cash flow in a business where say you need to keep recyling servers ever 1-3 years to keep up).

So leasing and renting have further tax implications for businesses at least operating within the US tax code jurisdiction more so than just areas that tax your propertly value on an annual assessment (like texas does on colocated hardware).
 

VPS4LESS

New Member
Verified Provider
Make it easy colo with me i have 20 open slots in a cab right now i need to fill lol
 

comXyz

New Member
@OP forgot to mention the hardware maintaining/replacing cost when owning hardware.

I still prefer to rent hardware for my projects.
 

cspacews

New Member
Verified Provider
Well nice write up. Quite informative with those diagrams.

You have missed out on:

1) If there is a hardware failure Racking/Deracking hardware. You need to co-ordinate the time for spare from local vendor to reach your DC ASAP(Additional Charges Shipping+Urgent+Spare) and if its a holiday ohh BAM huge downtime!

^ to avoid this you need to have sufficient inventory. But for 1U who would maintain this?
 
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