Do these numbers make sense? Value play by metering out utilities

[TangoWhiskey]

Does anybody have any experience with doing a value play in an apt building around metering utilities and going to tenant pay? I read info from the US that you can expect to reduce rent by 70 % of your current utility bill to compensate and you get to keep the 30 %, which on a 20 + unit building the cost of metering the utilities could be a nice investment the year before refinance.



In my case the building has 24 units and avg rent is 767 including utilities. Utility cost is 108.50 per month per unit , and I could put the heat and lights on the tenant while I pay hot water still. A power company energy audit last year said the hot water bill was only 894$ per year or 3% (yeah right), with heating 38 %/fridges 7%/lighting 11% etc. If I add up all common area power uses plus hot water to make 15 % of total bill I might be able to off-load 85 % of the utility bill. An electrician has told me it will cost 1500$ per unit or 36K.



On a monthly basis if I can put 85 % of power on tenants then that would theoretically cut costs by 85 % of power bill = 26560$. I would reduce rents by 70 % of power bill which = 21870 when leases rolled over and tenant assumed utilities. Tenants would stop wasting heat and lights then the net savings would be 26560 - 21870 = 4690. 4690 added to NOI annually with a cap rate of 9 would be about 52 K added in building value.



Put it another way and the 36 K upgrade cost will yield 4690 annually or 13 % and at refinancing it could all be returned to you with a bit of profit on top.



There will be quite a bit of extra hassle to go through this process and there may be some tenants who leave, perhaps because they can't get power in their name. It may also be a trick to ensure people on the ground floor who burn most heat don't end up subsidizing people on the top floors. Most other apt buildings in this town you pay your lights already but not heat. Plus I could put togethor a pretty clear package for tenants to explain the change at lease renewal time and make it seem like a great idea for everyone and the environment . It would also be a good experience in trying different forms of value play rather than typical reno situations.



Thoughts anybody? Do my numbers seem at all accurate and does anyone have any experience with this?



Thanks



Tris Winfield

KKT Investments

 

[Thomas Beyer]

I can tell you exactly what will happen.



Tell me though first:

a) what province is this ?

b) how is the building heated today (electric ? central boiler ? )

c) does the building have individual electric meters already ?

 

[TangoWhiskey]

The building is in Nova Scotia so no rent controls

Building is electric heat, electric hot water and electric lights.

The building is not currently individually metered. This is the quote for 36K.



A long conversation with the utility provider also revealed that by putting power on tenants the power bill tax rate would drop from 15 % on me as a single metered commercial account to 5 % as a political freebie to households.



I am really interested to know what you think. Thanks again in advance. How many buildings in your portfolio have you done this with?



Cheers







Tris

 

[Thomas Beyer]

We submetered 3 properties in Alberta, as I too thought: what a great idea. Lower cost and make tenants responsible for heat.



The result was a VAST increase in move-outs and vacancies. VAST.



Why ?



Because most tenants are used to a fixed price. They have a budget and lack the discipline to calculate savings. If they were that disciplined they'd be home owners.



Most people prefer to own as opposed to rent. So, the only way for you to pull this off is to start with new tenants only and offer a special, say $1000 with heat included or $850 and you pay heat on top and see what happens. But even that possible $50 savings might be too low or too unknown to a new tenant to say "I'll take it". It needs a good site manager to explain it, coupled with incentives. We realized that as soon as we stated "heat is extra" the application rate dropped or the % of folks not showing for an appointment went way up.



In addition, we had folks in the ground floor complaining they had to pay way more than advertised, as indeed they were heating the upstairs units. Thus, the rent had to be adjusted down even further, and most of the top floor tenants almost paid no utilities.



Thus, the only way to pull this off is with a great onsite and if it is common to pay for your own heat in the city anyway. Is it ?



A cheaper solution might be thermostats that have set timers, say heat down at 10 pm, at 21 degrees at 6 am, 16 degrees at 9 am, at 21 at 5 pm etc. with an override feature every hour.

 

[RedlineBrett]

[quote user=ThomasBeyer]



The result was a VAST increase in move-outs and vacancies. VAST.







Our building has tenant-paid electricity but owner-paid heat and water. We have lots of trouble making sure that the tenant has signed up for a utilities account and I find myself paying for (and then trying to retroactively collect) for a few months of electricity with tenants when they move in. Sometimes the tenants are required to submit a small deposit to the utility proivider to start an account and they don't have it so there are some issues there too. It's a PITA.



In our portfolio of smaller stuff we look after lots of fourplexes and up/down suites. What we do is we have the utilities in the owners name and then advertise the rent and then a fixed surcharge for utilities on top of it. In our leases we say that utilities will be reconciled every six months based on actual utilities consumption. So after we have six months of statements from the utility provider we do the math and if the tenant is overconsuming then we charge them back. Our costs are coming down and the system is starting to soak in with my staff and our tenant base that is on it. I think a similar model could work on an apartment complex but it does add an administrative burden to your business as a cost to reducing your utilities exposure.

 

[brentdavies]

Alberta has "outlawed" metering for electricity, heat and water unless there is an acceptable "approved" meter. So some of the big players were forced to backtrack on the "sub" metering charges. Big issue on older highrises where there was only one electric meter, one gas meter, and one water meter.



What works in the USA does not work in Alberta.

 

[TangoWhiskey]

Thanks everybody. I like the idea of the reconciliation as that might be a way around it. In this case though I think what might be the end solution is that I have optioned a 40 unit lot next door with the plan to build a new 40 plex that is elevatored and join the two with an elevated pedway/walkway so I can appeal to the retiree profile that is the future for much of Canada. If I was to do this utilities value play I'd do it when the new building is going up so people accept the change as part of a larger re-positioning as adding elevator access should move rent levels higher in both the old and new buildings, and adding new siding on the old building should change the community perception to seeing the whole complex as new.



Does anybody have experience with adding an elevator to an existing building and the impact of that on tenant profile and rents? The ball park figure I have is 100K for an elevator of 3 to 4 stories in addition to new construction costs per unit but by adding a pedway to my existing building I can spread that cost out over a larger number of units. Anybody have any thoughts?



Thanks again



Tris

 

[DenisEncontre]

Brett, when you advertise do you for example put in the ad "Rent $1,000.00 per month + $150.00 per month for electricity + $100.00 per month for Gas Heat" or do you just say "Rent $1,000.00 per month + $250.00 per month for utilities"?



do you give the tenant a refund if they under consume?

 

[RedlineBrett]

[quote user=TangoWhiskey]

Does anybody have experience with adding an elevator to an existing building and the impact of that on tenant profile and rents? The ball park figure I have is 100K for an elevator of 3 to 4 stories in addition to new construction costs per unit but by adding a pedway to my existing building I can spread that cost out over a larger number of units. Anybody have any thoughts?






I bought my first ever elevator this year. Not excited about buying my second. here is a thread you should give a quick read to.



http://myreinspace.com/search/public_forums/Real_Estate_Discussion/62-22753-112697-Elevator_Mafia.html#112697



What you are proposing sounds crazy. Leave the buildings seperate. I was quoted $350k to put in a new 5 stop elevator in an existing shaft in my building. For what you are considering I bet you are closer to 500k.

 

[RedlineBrett]

[quote user=DenisEncontre]Brett, when you advertise do you for example put in the ad "Rent $1,000.00 per month + $150.00 per month for electricity + $100.00 per month for Gas Heat" or do you just say "Rent $1,000.00 per month + $250.00 per month for utilities"?



do you give the tenant a refund if they under consume?




We advertise the suite as $1000 + utilities. We don't put the utilities cost on the add. When they call we give them the number and then upsell no utilities approval, no negotiating with downstairs tenants, no disconnects or price changes when someone moves out. Then we say this is the best for both parties to make sure utilities aren't being overconsumed.



If they ask for the year over year reconciliation we give it to them and yes if they have underconsumed we credit them back. Most don't ask so we don't check.

 

[Thomas Beyer]

We own a few elevators. And we have been considering joining two side-by-side buildings with a new vestibule and 3 story elevator, likely in the 250-400k range depending on quality. Doable, yes, but like any construction project much expertise is required to plan, design, fund and then construct on time and within budget. It is a different business altogether. Building a 40 plex is a $4M project where at least $1 to $1.5M cash is required even if the land is free. Usually this makes little sense if a rental, only as a condo project.

 

[housingrental]

This is a good post Thomas and I can confirm I've had similar experiences with potential renter choice on pricier inclusive, responses to ads, and no shows.

I regularly offer places at one price inclusive, one price plus util's, explain and/or provide actual past usage info, and the vast majority of time the consumer makes the irrational decision of paying inclusive for more.





[quote user=ThomasBeyer]

Most people prefer to own as opposed to rent. So, the only way for you to pull this off is to start with new tenants only and offer a special, say $1000 with heat included or $850 and you pay heat on top and see what happens. But even that possible $50 savings might be too low or too unknown to a new tenant to say "I'll take it". It needs a good site manager to explain it, coupled with incentives. We realized that as soon as we stated "heat is extra" the application rate dropped or the % of folks not showing for an appointment went way up.

 

[housingrental]

This is a good system Brett... until the tenant does not quickly pay for the overages and you are in Ontario... even more fun with student renters and the amount could be $18.76 per person on individual leases....



[quote user=RedlineBrett][quote user=ThomasBeyer]



The result was a VAST increase in move-outs and vacancies. VAST.







OWhat we do is we have the utilities in the owners name and then advertise the rent and then a fixed surcharge for utilities on top of it. In our leases we say that utilities will be reconciled every six months based on actual utilities consumption.