Building Rentals - Heating Advice?

Question

Hello everyone,

I work for a modular home builder in Maine and I've been making offers on existing multifamily properties. As many know, it's a tough market out there, and Maine real estate is really old and beat up. So I've decided to start my search for land. I believe I can follow a 1.5-2% rule (even at retail cost) in a more Southern part of Maine (as far north as Lewiston/Auburn) with a completely brand new multifamily.

I've priced out a few floorplans and found one I like. The problem I'm having is deciding on a heating system to put in. I'd like to set it up so each unit pays for their own heat. I don't need AC, because most homes in Maine don't have it. People would typically get a window unit to put in for the few months of summer we get here. I mainly deal with selling single family properties at my work, so we would normally do a base board heating system fueled by propane or oil. I'm leaning more towards electric base board, so each unit could be responsible for their own electric bill. I could also do wall heaters, because these units will only be in the 700-800 square foot range.

Any recommendations? It does get quite cold here during the winter, so I'd like to also keep this efficient for the tenants if it wouldn't have a huge up front cost.

Dan Weber · Answer

@Ryan Smith keep in mind that financing costs for land are usually on a 15 year note so the monthly cost will be more expensive that buying land with a house on it.

In regards to the heating system, I would highly recommend heat pumps. You could have them installed after the homes are built. Given that these are smaller units, if you can keep the layout relatively open, it would be a GREAT option. They do heat and AC, powered by electricity (paid for by tenants). Check out the info on https://www.efficiencymaine.co... as they offer rebates as well as financing. Reach out if you have any questions.

Carl Hebert · Answer

@Ryan Smith I agree with @Dan Weber on the heat pumps. For secondary heat you could install inexpensive electric baseboards and the tenants would only need to use them when the temp drops below -15 I believe, depends on the heat pumps that you install. Bonus is the tenants get AC and you do not have air conditioners hanging out your windows.

How much are your units costing by going modular?

Robert Beardsley · Answer

if possible i would do natural gas its fairly cheap. but please do not put electric base boards. your tenants may want to find out where you live and rob you. i just took the ones i had in a unit out. tenant was on old lease from previous owner. my first bill was 500$. for more information it is a 2 bedroom second floor newer windows and about 950 sq.ft.

Scott Davis · Answer

As a huge upgrade over baseboards but still on the more affordable end of the spectrum I too would suggest taking a look at mini splits (ductless aka "mini split" electric heat pumps) ESPECIALLY if you have a fairly open floor plan. One caveat I know their efficiency may not be that great in extreme cold, so in Maine you'd need to talk to local hvac installers to pick the most appropriate models (and probably/may need the type with electric strip heat backup in that climate).  The efficiency is way better than standard electric, yet purchase & install cost is significantly less than a duct-ed heat pump or duct-ed gas furnace etc. Especially if the building is designed for them, you shouldn't have any problems with the banks 'accepting' them, I think that's a misconception or you're thinking of a different situation..  You might want supplemental small electric wall heaters or baseboards in bedrooms (if they will be closed off from the main heated area), and I've been able to get away with just electric heat mat under tile floors for heating the  bathroom in these situations as well.  The rest of the world relies pretty heavily on mini splits for buildings of all shapes and sizes.. Multi zone units can work great for larger/more complex spaces too!  I would usually go with Mitsubishi even with the premium price  but these days the  other 2 or 3 big names probably make quality products as well

Robert Beardsley · Answer

i would stay far away from electric heat unless its only used as the back-up. it can be extremely expensive. i got a surprise electric bill of $500+ in April this year because a tenant decided to use the electric heat instead of the the gas heater. normally i dont pay heat but i just bought the place and they where on the existing lease. needless to say the lease end next month and that is being changed.

Ryan Smith · Answer

Thanks for the feedback on the heat pumps. Retail number (can't give cost number, obviously) on a 4 unit is around $350k, plus land. If we say $400k with land, and Auburn rents at $1,250+/unit, it's a solid deal, especially considering the lower maintenance costs with a new build. Closer to Portland has even higher rents. 1.25% in Auburn area, and 2% in certain parts of Portland where rent is $2k/unit. Not a bad percentage in either place. Just need to find the right land. I guess that's the next step, but I was trying to put the numbers together considering the heating systems in the final build number.Thanks again for the feedback everyone. Glad to have BiggerPockets to gather information from.

Ryan Smith · Answer

Thanks for the information. The land would be paid with cash and used as equity/down payment for the rest of the project. We do an "end loan" instead of a construction loan, so the costs will be held by my company throughout the process of building. Same with the heat pumps, it would be paid upfront with the "mortgage". No financing.

We do heat pumps, but normally banks like to see a separate system installed for heating. I may consider doing wall heaters as that primary source, along with the heat pumps, if I can get the heat pumps for the right upfront cost. It may be a selling point where I may be able to get more for rent. But I was trying to avoid that much cost for a heating system. Might not be able to escape it! Thanks for the company recommendation - I may need more bids, seeing that our contractors in that area are slammed busy.

Amy A. · Answer

Electric baseboard is the most expensive type of heat. The only landlords I know who like it are those whose tenants are on LIHEAP so the government pays for it. Regular tenants can't afford it.

I am interested in multifamily modulars as well. I can't get the numbers to work, but would be interested in learning more about your strategy.  I have the land if I can get it rezoned.

Dustin Allen · Answer

@Ryan Smith

Wall heaters are pretty affordable and can be pretty effective if placed right. They usually work best on a middle wall in the unit. One on each level if it’s a two story.

I have no experience with baseboard, it’s uncommon where I am. It’s very cold here for at least a couple months each winter and we mainly have wall heaters or central air units. Central is  little more expensive to install but definitely gets the job done. I wouldn’t want a shared central air system in light of recent events though.

Building Rentals - Heating Advice?

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