Do I add a 2nd furnace to improve cash flow?

Question

Hi all,

i am new to REI and would like some advice on how to look at a issue that exists with a duplex i am interested in.

currently, the owner pays for the heat (oil) for the 2 apartments - his estimate is $4000 a year.

However, if i were to purchase I would prefer to have the tenants pay. the issue is that there are two oil tanks (connected) but one furnace that powers the heat for both units (hence the owners pays as no way to separate out).

i have run the number for the property. Since this would be my first duplex i have been conservative with the numbers - after subtracting out vacancy rate of 1 1/2 months for each unit and a repairs/maintenance of  10%, the combined cash flow would be $400 per month.

However, this also takes into account the $334 per month the owner pays for oil.

so my question is, do i go ahead and add a second boiler (likely ~$5000) which would then allow me to have each tenant pay for their own oil and increasing the cash flow to $734?

Since i am looking at C class units (this duplex is on the market for $48000), is it better served for my $5000 to go toward a duplex that already has a separate unit? I should say, that other than the oil issue, both units are completely remodeled.

Many thanks for your advice

Neil

Rob McGahen · Answer

To me, $4,000 a year for heat for a duplex sounds expensive. Is oil your only heating option? As others up thread have mentioned, electric may be an opportunity. What about natural gas?

Also, if that much oil is being used, how well insulated is the building? If that much is being used in the winter, then what do the electric bills look like in the summer with a/c?

I'd strongly recommend taking a look at not only at redoing the HVAC, but also improving the insulation (including new windows/doors).

If I were a tenant, it would be a large red flag if my utility bills were so high, and I knew I could go elsewhere and pay significantly less.

So, take a look at all of this, run your numbers, and see if this property is still worth pursuing. Good luck!

Tim Holmes · Answer

@Neil Beeharry if you take one unit off the oil burner, that oil burner will be oversized for one unit. A good HAVC guy will be able to run manual J tests to properly size your units.

Neil Beeharry · Answer

Hi Kevin,

interesting idea and one i had not thought about.

I'm wondering the recourse if a tenant disputes how much they should pay.

Let's say i do split 60/40 due to the difference in apartment size. Now let's say one apartment is away on vacation for 2 weeks - they could accurately argue that they did not use they allocated amount of oil and dispute paying for it. would i pay out of pocket for the difference?

seems it would set a bad precedent.

i like the idea, i'm just not sure of the feasibility of applying it.

would like to hear more of your thoughts on the matter.

thanks

Neil Beeharry · Answer

Hi Mark,

there are two individual tanks that are currently connected. If i were to add an additional furnace, i would connect each tank individually.

along with the info from @tim holmes, the furnaces may need additional modifications for the size of the apartment.

electric may be a good way to go.

thanks

Mark Gibbs · Answer

Bil the heating oil cost to the units on a proportional basis by square footage and leave it at that. Just because someone isn't home for two weeks doesn't mean they are going to turn down the heat, especially if they aren't paying for it.

And maybe I'm confused but if you are adding a new furnace they are still drawing off of the same oil tank how would you split the cost of the oil?

@tim holmes is right, the remaining unit will be oversized. A split unit will be better.

Travis Frenchak · Answer

@Neil Beeharry Weather or not its a good idea to invest money up front depends on a lot of things in my opinion. From my understanding you have not purchased this property yet, so if it was me i would take into consideration weather or not this property is located in a hot area that may have good appreciation in the short term. Also weather or not this is a great deal. If neither of those I personally would not invest that kind of money into a deal that is average. But again that is just my opinion as there are a lot of average deals out there.

Tim Holmes · Answer

I think @Travis Frenchak idea of electric baseboards might the lowest cost solution. However when I tell my prospective tenants that the ductless mini split in their unit is only going to cost them $50 per month, in the winter, it's a big selling point. So like @John Underwood was saying. If ducts are in place use two heat pumps. If ducts are old and need to be replaced consider two ductless mini splits. I think you may be able to buy two 24000btu mini splits for $5000. I will admit my western Washington winters are warmer than Conn.

Neil Beeharry · Answer

Hi Travis-

yes, going with one unit having oil, the other having electric baseboard is another possibility.

would you put in the extra expense (upfront) to allow the savings down the line (ie having the tenants paying for their oil/elec), or not consider this unit as recouping that outlay would take a few years?

thanks

Travis Frenchak · Answer

If electric is separate maybe consider electric baseboard heat. Not sure how people view that on here but it looks like that will be the route we will go as we have 3 units all sharing a single furnace and our electric is already separate. It is fairly inexpensive but not the cheapest to run. However I'm sure our tenants won't have windows open and short sleeve shirts on in January anymore.

Do I add a 2nd furnace to improve cash flow?

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