First purchase - update to electric heat, or see what happens?

[Tyler Myers]

Hi BP Community,

First purchase in the works, closing June 29th! Found a 4-plex in residential area (population <3,000) about 45 minutes away.

Purchase Price: $92,000 (MLS)

Bank Appraisal: $99,000 (appraised "sale" value)

Mortgage: 20% Down, 5/15 ARM (self-employed, first mortgage)

Rent Roll: Full occupancy = $2,050/mo; currently = $1,630/mo (3 units with long-term tenants, studio unit vacant)

Roof: No leaks but needs shingles in 1-3 years

HVAC: One gas boiler, hydronic/radiant heat and hot water; no AC

Other: 2500 square feet. All utilities shared, no metering present. Build year 1925. City water/sewer.

PITI: $8,500 annually

Owner has always paid utilities as there is no metering in place. Books show about $5,500 annual expense there.

So conservatively we have:

Monthly Rent - ( 5% Vac + 10% CapEx + 10% Repair + Utilities + PITI ) = 2050 - (100 + 200 + 200 + 450 + 700) = $400/mo**

**does not include Property Management, paying myself or someone else 8% of rents results in cash flow of ~$230/mo

That said...

Rents are slightly below market given that utilities are included. Could probably get $2,250 with some cleaning and fresh paint, while continuing to pay all utilities.

I am considering, however, installing baseboard electric heat and sub-metering the system so tenants will pay for their usage instead. Walked through with a contractor and received a bid for $10,000, all parts/labor. I estimate this overhaul would save about $200 per month in utilities across the gas (boiler) and electricity charges. It's unlikely I would raise rents in this scenario as tenants would then be picking up their bill for heat/electricity. I would plan to pay for majority of upgrades with a line of credit.

I have a few additional reasons beyond monthly cash savings to sub-meter the electric: 

1) There is one thermostat in the house, controlled only by tenants in the largest unit. Could deter new tenants in the future.

2) The boiler needs servicing and looks heavily worn/rusted, all pipe elbows are significantly corroded on exterior.

3) Metering will make it easier to survey usage and determine equitable rent adjustments.

So...best to "save" $200 per month in utilities, paying itself off in the long run (i.e. 50 months)? Or try out the "blue sky" rent increase to earn $200 more per month?

Now, after typing this out, I've come to another option...leave the boiler in place, add in the electric heat capability/metering, and just keep the boiler chugging along at ~50 degrees year-round to ensure the structure is always "thawed". Tenants would then pay for whatever temp above 50 they like to live at. Is this a good compromise? Do I have any idea what I'm talking about?

Summary: 3 choices:

(A) leave as is, slowly increase rents to market levels (while saving for boiler explosion)

(B) overhaul electric, maintain rents

(C) best of A&B, keeping the boiler system in service and paying for some heat usage

Thoughts? Thanks for taking time to consider!