Here's my 3-gallon setup: 5-gallon Home Depot cooler (Lowes' cooler is identical and mine was on sale for $12 the day I bought it); home-made strainer from plumbing supply line (I can't drink beer made from anything called "toilet"
); ball valve; 5-gallon kettle. Cool in the sink with ice -- I can easily get to 65 by emptying our icemaker and using one bag of ice, plus as euge and others have encouraged, stirring/whirlpooling.
You could try BIAB and see if it worked for you before springing for the equipment... but using a mash tun helps me avoid one more awkward-lifting scenario. Even 6 to 9 pounds of grain, sopping wet, is a lot to deal with, especially indoors.
I did my setup myself, with various instructions, originally for a 2-gallon cooler (shown here http://www.flickr.com/photos/kgs/sets/72157615665837325/
), but as I expand and upgrade I have been very satisfied with the parts from bargainfittings.com . I put a SS valve on my larger kettle for those very rare days when I can brew outside, plus some additional parts for other equipment, and I'm going to go back to them for another SS ball valve because I'm uneasy about the brass ball valve on my cooler. Though you don't need
a ball valve (per Denny's instructions).
I've contemplated going up to a 9-gallon rectangular cooler. The main reason I'm considering that is to reduce or eliminate sparging on some types of beer.
On 3 vs 5, I've read *somewhere* (don't trust me on this) that doing full boils is better than partial boils+topping off. Also, when you're cramped for space, 48 bottles is a lot. When you're a new AG brewer and your process isn't dialed in, 48 bottles of not-so-great beer is also a lot to drink through or give away. However, when you have a great 3-gallon batch you'll be sad it's so small and you'll be reluctant to send three bottles to a competition. Such is life.