8 unit property with only 1 gas meter, 1 water meter - what to do?

Question

Hi everyone,

I'm under contract for an 8 unit right now and the leases say "LANDLORD PAYS FOR GAS AND WATER".

This isn't something I really like b/c I can totally see tenants abusing this so I wanted to know how do you handle this? Do you just make sure to build in the cost in the rent to cover this or how else?

I've thought about inquiring about splitting it, but am not sure. Do any of you know approximately how much splitting 1 gas/electric meter into 8 would cost? Would it be worth it in the long run?

Reviewing the property, I've built the utilities cost into my numbers and it will still be a good buy for me, but if I can find a way to drop this expense, I'll be able to increase the value of the property so much more. If it matters, the exit strategy on this is a 1031 exchange in 2 - 3 years.

Thanks everyone!

Joel Owens · Answer

Tony your exit strategy will be just as important as your purchase strategy.

I am not big on buildings of that age.Way too many issues galvanized pipes,asbestos,knob and tube,foundation issues,etc.

The real key is over the years what updates were done and were they completed up to code??Have you checked on property insurance for the building??

Buildings of this age can have costly insurance as insurance companies know unless everything has been replaced the failure rate for things increases along with frequency of increase of claims.

What is the turnover rate for the apartment and what vacancy is the seller reporting?? Watch out for rent concessions or waiving the security deposit to make occupancy look high.Have you seen the schedule E tax returns yet??

Does this property sit on a large parcel of land?? If so it might be allowed to have higher density built on it.

Example you buy for 155k and hold for 1 year.Owe in the 140's and then a apartment developer approaches and on the land can build  an 80 unit and buys you out.

Is the land on a corner or near a corner?? What is around it? Was it around commercial years ago and now the area is turning more residential or is it strong for commercial??

Here a 1 acre to 1.5 acre can go for 700,000 to 1 million from  a restaurant,gas station,pharmacy purchasing the land to develop.

So don't just look at the building in this deal.I am always looking at a property from multiple angles that the seller doesn't know or thinks about.

With that said you don't pay on potential but the current numbers.

It's a given in my area that newer buildings (large complexes)will ALL be metered out.The landlords want to pass on all utility cost to the tenant so that rent margins and cash flow is protected against inflation with commodities.

With buildings you have to compare apples to apples.My 20 unit I own is 5 buildings of quad's.They are 30 years old in an A location.They are town home style when you walk in main level dining,kitchen,1/2 bath,living room,and the upstairs each has a master bedroom with a full bath about 1,200 sq ft in each unit.

As tenants have told me they like it because it is more like a house feeling.They like the fact unlike an apartment complex where you have people below you,beside you,back of you,above you where you can hear everything.Also you can't control the tenant upstairs using a cheap hose on a washer/dryer and then having a huge water leak into your unit.

There are advantages such as those properties typically have amenities etc.

Does this building you are looking at have laundry on site,laundry in the unit,or does the tenant have to go to a coin laundry down the road to do clothes??

The further inconvenient the laundry the more it will keep rents from rising.

Joel Owens · Answer

Hi Tony,

The issue is will the coming increase in water and gas pricing outpace what you will be getting in increased rents each year?? I believe the answer is yes in many cases.

Is your state deregulated for natural gas?? Georgia is and it makes a huge difference on price per therm who you go with.

On separating out on individual meters it will depend on the area.If tenants are used to all landlords for the are including utilities for rent then your tenants will simply go down the street.

If most of the properties around you are running on separate meters then most likely the tenants would stay as every other landlord operates the same way for the area (assuming your rent rates and quality of the unit is good and clean).

How old is this building?? Even though the roof,water heater,electrical, plumbing,heater,appliances are good today they might be at or over there life expectancy.

I love multifamily.Post some more details and I will try to help.

Did you get actual bills for the last 12 months average for water and gas to match up to what the seller is reporting?

Aaron Mazzrillo · Answer

All of my multifamily properties have single water meter. Some have single gas meter. If you are paying the gas, you can put in electric stoves which suck, but will reduce gas expenses. I get more in rent for properties where I pay the utilities. As long as you factor in the expenses when buying the bldg you should do all right.

I have gotten several estimates to repipe some of my units so I can separate the gas meter. The numbers have come in between $11,000~$25,000 for my 3-4 unit bldgs. I would shop around and get several estimates. However, the return on the investment typically makes sense as I recover my expense within 3-4 years.

Frank Maturo · Answer

Usually you can get gas meters for each unit but it costs $$$.

Tony Nguyen · Answer

Chris - good point.

Joel - I agree, the year is the only thing im sketchy on. I'll pay very close attention the property inspection.

I have checked on insurance and it's about 1k per year which isn't too bad. Seller previously paid 1500 for almost the same policy.

You know what, speaking of waived deposits, of the 8 units, 4 are about 3-4 months new which is fine. But the other 4 look below market with No Deposits. What makes it more odd is the leases are years old, like 3-5 years old. Since you mentioned this, I'm thinking she may have kept them there w no deposits to keep them rented? Afraid of vacancy? I've requested for tax returns, but haven't seen them yet.

No I actually don't see it near a corner or a large parcel. It's a good point though, I'll keep that in mind for future reference.

Newer buildings are metered out, I agree. I like that much better due to the inflation of commodities point you mentioned.

Laundry on site I am not sure of yet either, i'm going to inquire it w the seller.

You know, I'm going to post up a deal analysis for this property. All the things you're pointing out is making me have 2nd thoughts. To me the cash flow is good, but the potential of vacancies, the C property status, utilities etc is starting to make me question it. Please analysis it when you see it up =) thanks Joel

Chris Colvard · Answer

The issue is not to buy on potential that you create through the above strategies. This is how you maximize your return later.

If there is not an upside on the rents "as is", then do you really have a deal?

If you need to do this to make your exit strategy work, then it's not a good deal!

Chris Colvard · Answer

Converting to electric stoves will most likely result in an upgrade in electric service size, that can trigger complete upgrade of the units building meter (or meters) and wire size to each unit for the stove.  Again, can be costly since you will have to use a licensed electrician and bring everything electrical up to code.

Water can be done the same as gas.  But, you will probably find that your comps do not support this on an 8 unit.  Maybe on duplex to fourplex.

Your rental comps will tell you the rest.

Tony Nguyen · Answer

Aaron,

Electric stoves - simple, yet genius! That should help trim the expenses a bit. If only there was something I could do about the water.

10k-25k for a 4 unit is heavy. If it takes you 3+ years to recover, I might not even look into that route as I'm just looking @ a 2-3 year hold.

Tony Nguyen · Answer

ok gotcha Chris, I'll do that. thank you

Chris Colvard · Answer

Do a market survey of available rentals in the immediate market.  Especially, on units in the same type of building, year built, etc...

Contact the building department (building codes) and gas company to find out about the rest.

8 unit property with only 1 gas meter, 1 water meter - what to do?

Most Popular Reply