Should I separate utilities; This means more CapEx right?

Question

I am looking at 2-4 unit multi-family properties, some have separate utilities, and some a mix.  The mix is mostly Owner pays water/sewer/trash and gas heat, and tenant pays electric.  With the same neighborhoods, the rental listings are mixed like above, all separate, or a mix.

From my research on this site, it seems separate utilities are favored, as long as the competition offers the same.  However, since I am comparing properties that are similar in size, net cash flow, and price, I am wondering should from a CapEx perspective would it be better to have one large furnace, versus 4, and one large hot water heater, versus 4.  One might argue that maintaining or even replacing 1 furnace, should be less expensive than maintaining, or when the time comes, replacing 4 furnaces.

What are your thoughts?

Jeff Kehl · Answer

@Christopher B. i think you have a valid point that it is more efficient to have a single furnace, hot water heater, water line, dumpster than individual components. That's why a lot of these older apartments were built that way. It was cheaper and easier to build them that way.

But that's not the point most investors focus on these days. We want to shift those costs to the tenant because that raises the ROI of the property and it increases the value of the property.

If you can successfully do that with no capex expense by simply billing the tenant for the utility use that is best case. Sometimes that is not possible because of local laws and regulations and sometimes it is not possible because the tenants will move to a property where they don't charge for utilities.

So you might actually look at physically separating the utilities. That should be a pure financial analysis exercise. Have contractors bid it out, take the total cost and find out what the payback period would be for the amount invested. In some cases it makes sense in other it does not.

I had a plumber look at splitting water on a 4 unit building one time. He mostly just laughed at me because the way the piping was done it would have required tearing into just about all of the walls of the building and repiping everything. And water is very cheap in our area. So i just pay for it.

Could I split it among the tenants and just bill them an extra $8.50 per month? Sure but I have great tenants and no one else in similar units is charging for water.

However I did spend close to $100k to provide individual electric heat to 20 apartments that were formerly on a gas boiler because it made economic sense, paid me back quickly and increased the value of the property.

So my overall point is, it depends, you have to evaluate the individual property you are looking at.

Michael Bracken · Answer

I would say better to have individual components. Much cheaper and standardized equipment on the whole. Nothing will make your tenants want to move like running out of hot water. Plus they will need to be repaired/replaced at various times not all at once with a major expence.