How Installing Solar Panels on Multifams Can Earn More GRI

Question

A whopping 33% of the U.S. population lives in a rented apartment, and these apartments are power guzzlers. We can reduce their power bill by 2/3 with Green Retrofits and solar panels.

First, We Reduce the Utility Bill

We replace the house water heater with a solar water heater, add insulation, seal air leaks, add LED lighting, and replace the old appliances with Energy Star Rated appliances

We Then Add Solar Panels

The levelized cost of solar is now less expensive than the price of electricity. This savings, combined with preferential green financing, increases your profit spread.

You can spend some of the savings on lush landscaping and free wi-fi for all tenants, upscaling your building.

10 UNIT EXAMPLE:  Purchase a 10 unit building for $1,800,000  with a 25% down payment, ($450,000). Add an additoonal $70,000 into the loan for energy efficiency retrofits and solar panels. You will have reduced the utility bill by 2/3. You then increase the rents to reflect the tenant’s utility bill expense plus their Wi Fi payment, and keep the spread as profit.

Facts and formulas: According to the U.S. Energy Information Administration, Californians consume an average of 562 kilowatt hours per month. They pay an average of 16.25 cents per kilowatt hour, and have a monthly bill of $104.00.  Add a $39.00 Wi Fi bill = $143.00 total monthly utility bill x 12 months x 10 units = $17,000. Add $5,000 for water heating and house lighting = $22,000 annual utility cost. We have reduced this to $4,500 per year thru our retrofits, or by about 2/3.

The green retrofit reduced the electric bill by 40%, (per Build It Green California), from $22,000 to $13,200, Expressed in kWh: 562 watts Less 40% = 337 kWh x 10 units = 3,337 kWh per month X 12 months = 40,000 kWh per year.)

Solar Panels power formula: 40,000 kWh / 1.50 solar production ratio = 26,665 kWh / 300 watt panels =88 panels. @ $600 installed each = $52,800 in solar panels

COST OF RETROFIT:

$52,800 = 88 solar panels.

$10,000 new solar water heater

$ 7,200 insulation, led lights, caulking and repairs

$70,000 @ 5% for 30 years = $375 per month

This information is from TheGreenRetroFit.com

Sven Salvador · Answer

@Seth Borman really admire that you aim to create a space that’s clean and comfortable for residents.

I look at it as you’ve most likely saved a good amount of money on these properties in just energy and repair costs alone. If you would like to join Latitude's Regenerative REI meeting next month lmk. It's free and a great way for investors, agents and other folks in the sector to connect, problem solve, and get more info and resources on implementing regenerative design to investment properties. I'll share the zoom link on here then.

Joshua Dickman · Answer

Loving this thread!

I have been in the solar industry for years, helping clients save the most money possible by switching to renewables! I am more than willing and able to help fellow investors get the best bang for their buck on a top of the line solar system! Can offer discounts for multiple properties and referrals! We service about 18 states too!I'm just here looking to help, so if anyone has any questions about how panels work, how much you can save or if it makes sense for you, please let me know and I'll be happy to estimate a custom solar system for your property.

Cheers!

Seth Borman · Answer

Vacancy didn't change that we noticed. We did the boiler upgrade because the boiler was taking $500/yr to keep running, and the downtime was hell on the tenants. The new boiler didn't have a repair bill and didn't require a minor meltdown once a year. Same with the AC in that house.The added insulation is for tenant comfort. We try to offer a product that, while dated, is clean and comfortable.

Sven Salvador · Answer

*correction Dr. Joe Asamoah https://joeasamoah.com/about/

Sven Salvador · Answer

@Seth Borman thank you fro sharing. I'm sorry you experienced that after all the work you put into it.

What were you hoping to get from the upgrades initially? Or mores o what was the why for the insulation and the efficient modulating condensing boilers?

Did you notice a lower vacancy or turnover rate after installing the new systems and insulation?

Typically-and this is not just me saying this but other conscious investors I work with say retrofitting and energy efficient creates healthier and more comfortable homes often leading to more comfortable and happy

Dr. Joe Samoah is an investor in DC- he finds beat up houses and does top notch remodeling to the homes and rents to section 8 residents.

He says the Biggest expenses to a landlords are vacancy rates-when the resident is out your out of thousands fast due to vacancy, repairs etc. He sees it as you put them in an environment they'll never want to leave you reduce those losses. Also higher quality systems = less issues leading to more reliable homes and happy residents.How much are you saving on your energy bill in these homes with the upgraded systems-Have you calculated the savings in expenses you have earned from converting to the energy efficient systems and insulation as well?

Seth Borman · Answer

We bought a master metered 7 unit apartment in 2016 for $572,000. We put in heat pumps to replace the gas boiler, but again it is master metered so we couldn't get any more money for that. We implemented a utility recovery fee and increased the rent because of the AC. In another deal I replaced the boiler with a new boiler. We went from a 50% efficient gas boiler to a 96% efficient modulating, condensing boiler. AC and shoulder season heating came from an 18 SEER mini split (it was 2011 or so).We owned that house for another six years and never saw a dime of increased rent because it was an efficient house.We also do insulation in a lot of SFRs but that doesn't come up.

Sven Salvador · Answer

@Seth Borman what market have you apples this to? What kind of drawback have you experienced from tenants this?

Sven Salvador · Answer

Seth. Great question! Explaining to the tenants it’s benefits and offering free wifi to them is a way in. I have not personally done this myself since I’m on the realtor side-I more so help my clients with the consulting side and finding the right properties to apply something like this too. I’m part of a regenerative real estate team called Latitude Realty and we have some investors that have tried similar things to this. Neal Collins is our coach and co-founder of Latitude and he has tried something like this. Here’s what he shared on Bigger Pockets about his experience and how he made it work. Highly recommend checking out his posts since he breaks everything down.

“Being in a relatively expensive market I know how discouraging it can be to try and break into real estate scene, particularly the multifamily space. We're in Portland, Oregon and very few cases can you hit the 1% "rule", and if you do you have to be creative.

I wanted to share a win today that has been in the making for the past 10 months because I think it is a good example of what a low cap environment looks like and what a solid base hit looks like for those that want to invest in small multifamily deals.

Here are the details on the property:

9-units in an up-and-coming neighborhood

Purchase price: $1,550,000

Cap rate: 4.5%

Average rent was ~$995 and Owner was paying for garbage and water/sewer

When we took over we immediately had a couple units turn over, which was great because we wanted to get in there to do some upgrades (we do a lot on the sustainability side that include reducing hazardous building materials, energy efficiency upgrades, bike storage, decreasing utility consumption, etc). Tenants moving on their own volition also saves lots of money on relocation fees.

The gross income last August was $6,100.

We then started to fix up the units, made private decks, put in heat pumps in the upstairs units and radiant heating in downstairs units, re-did the landscape, put in covered and secure bike parking, fixed some plumbing issues, and took out a bunch of carpet. Internet was installed for the complex that is now a free amenity for the tenants, and we also put in storage lockers into the basement that are separately rented.

We didn't get to all the units because the tenants opted to stay in them and instead just pay closer to market rent. These units are still below market by about $150/month and in the future when they move they will get turned.

This week marks full stabilization with gross rents at $11,625---90.5% higher than when we took it over (there was a couple vacancies so it makes that number look great). Even better is that the water is now being billed back to the tenants on a pro-rata basis and eliminates a huge water bill each month.

After it's all said it done the property went from a 4.5% cap to a 6% cap when you factor in the amount of money that went into the rehab. It still sounds low, but the increase in performance has led to a $330,000 increase in value in ten months.

It's not a deal to retire off of, but the rents are between $1,250 - $1,400 for two-bedroom units so there is a huge demand for these units and will continue to be so, it's in  a great up-and-coming area, and it will be a great property to manage.

So the lessen is...don't be discouraged! It can be done!”

Seth Borman · Answer

Have you done this? The part I struggle with is "you then increase the rents..."I've done some of this stuff for years but I've never been able to get above market rents on the basis of the building being more efficient. How do you communicate this value to the tenant?