Buy-and-Hold Investor · Glen Ellyn, IL · Member since 2009 · 28 posts · 10 votes
In my area I find a lot of 6-flats/6-plexes that do not have central air, despite the fact that it is a feature which is highly attractive for prospective tenants.
When I try to search the web, including BP, it seems that almost no one talks about putting in the money and effort to install central air in these units. However, when I looked up the cost of a wall-mount furnace and A/C combo they only cost about $2k. I realize there's a fair amount of install cost for mounting the unit, wiring the unit, and installing ductwork, but it seems like it could be done for a ballpark of $4k-$5k per unit (I'm using a 2 bed/1 bath with about 750 sq ft as my example). And in my area, it could be argued that rents could go up $50/mth with this feature (possibly more). Not to mention the fact that these units are currently on baseboard heat with the landlord paying for gas (no separate meters). So the switch to electric heating and cooling would significantly lower the building's utility expenses.
Here are my estimated numbers:
$5,000 capital improvement
$50/mth or $600/year in additional cashflow
$50/mth or $600/year in reduced gas bill
Cash-on-cash return of 24% ($1200/$5000)
Appreciation based on 8% cap rate is an additional $15k
My question is this: Why is no one making this upgrade/conversion? Is there a big factor that I'm missing?
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
13y
Ben W.
A switch to electric heating and cooling - as it is most frequently performed - does not significantly lower the building's utility expenses, it simply offloads the cost to your tenants (separate metering). Sometimes it is more efficient to keep a central heating plant (gas fired), but that really depends on the building envelope.
In our buildings where utilities are already separated, we have been moving towards ductless mini-split heat-pumps as the primary means of heating (6-7 months/yr) and cooling (2-months/yr). We have also undertaken a multi-year plan to improve the building envelope on all of these buildings with the objective of a 40%-60% improvement in efficiency.
In our first completed project, our tenants have gone from an average utilities bill of $120/mth to ~$75/mth (these are ~750 sq ft 2-bdrm units). As we get better at the building improvement, we may be able to start renting with utilities included and be certain not to loose our shirts.
Buy-and-Hold Investor · Glen Ellyn, IL · Member since 2009 · 28 posts · 10 votes
13y
Roy,
Thanks for the reply. I completely agree that the switch to electric is essentially just 'passing the buck.' I've heard estimates from different investors that expenses that are moved from the landlord to the tenant accomplish about a 30% gain (i.e. if the tenant takes over a $100/mth utility, the rent might only go down by $70/mth, giving a net gain to the landlord).
You have an interesting point though, regarding improvements in overall energy efficiency. I assume you see the end goal as making your building more desirable so that you can ask for higher rents and/or have lower turnover?
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
13y
Originally posted by Ben W.:
Roy,
You have an interesting point though, regarding improvements in overall energy efficiency. I assume you see the end goal as making your building more desirable so that you can ask for higher rents and/or have lower turnover?
Precisely.
A little over a year ago, we acquired a duplex in a highly desirable location. It's an over/under configuration (3bdrm up, 2bdrm down) with a rent-roll of $2400/mth and an operating expense ratio of 34%.
The prior owners had undertaken some cosmetic rehab {& made some scary alterations to structure in the process} and had decommissioned central high efficiency gas furnace and converted both units to electric baseboard heat.
The cost of heating the building had actually increased by ~15%, but it was the tenants problem. It also helped to explained why there was annual turnover in both units.
We had an energy audit performed on the building and it scored a woeful 42 out of 100 (with 12 full air changes per hour). This spring we gutted the downstairs unit - as expected there was no insulation in the walls (typical for 120 yr old ballon framed buildings}. After removing ~5 tonnes of lath & plaster; replacing some structure damaged in a chimney fire in the building's past {estimated to have occurred prior to the 1930s before electricity was installed}; reconfiguring the space layout in half od the house {(re)moving 5 walls}; fixing additional structural and electrical faux pas by the prior owners and levelling the floors, we added ~3 inches of spray foam insulation (R18) into the wall cavities; rewired the house; and replaced all the original single pane, built in-place windows with Energy Star rated, triple-pane, windows {with glazings specific to their orientation}.
We put the electric base-board heaters back in-place; by code we need to retain them as an auxiliary heat source to the ductless mini-split heat pump (2 heads) being installed next week.
We are now finishing painting and trim. New tenant arrives next week, but we have been sending her updates and photos since she signed the lease (before we started the renovation) and is very excited about what we have done.
When all is said and done we expect to be very close to our {upper} budget range of $13K ... structural issues we found, led to the reconfiguration of the layout {I can be prone to "while I am here" syndrome}. I also used the opportunity to wire the entire unit with Cat-6 Ethernet for the Tenants and for our building monitoring and automation system.
Next spring we will undertake the same to the upstairs unit (should be easier as we do not plan to move any walls upstairs and the floors are fairly level already {one of the few benefits of balloon framing}. Our budget here is the same.
Once all the internal bits are done we will reside the building - and are planning to add another 1" of polyisocyanurate hardboard insulation {which will require removing and resetting the windows we just installed to adjust for the new wall thickness ... a little rework that we have not found a way to avoid {yet}]
Once all the above has been completed, we will conduct our "post retrofit" energy audit to see if we hit our target of scoring 75+ out of 100 with fewer than 3 air changes per hour.
As you stated, the long term goal is to keep our buildings attractive to tenants by making them healthy, efficient and modern (while retaining their historic charm) homes as energy costs rise.