Skip to content

Posted over 10 years ago

Separate Utilities as soon as it makes sense!

Separate Utilities as soon as it makes sense.

Although you can deduct utility expenses since they are ordinary and necessary it can add up after a while. Replacing utility equipment to ensure tenants are paying for the ever increasing costs of utilities makes sense in the long term. A simple cost/benefit process for calculating and comparing benefits and costs of separating out utilities. Improvements such as installing new furnaces and water heaters are depreciated over the lifetime of the property. I typically look at what my total cost is to separate out the utility vs continue paying the utility for the tenants. Does the benefit out way the cost?

Example, I acquired a 3 family in Feb 2012 with one oil burning furnace that provided heat and hot water to tenants at Landlords annual cost of $3,300-$3,500. In addition they were not zoned so basically the previous owner on the first floor controlled the temperature. I was assuming costs to be much higher since I was not going to occupy the first floor and keep heat to the legal 65 degree temperature. In addition after talking to the current tenants they were not happy that they did not have control over their heating temperature.

Before Pictures of Boiler and Water Tank:

2012 04 04 08 23 07 P1030060a

2012 04 04 08 23 36 P1030063a

After much discussion with HVAC and a Plumber I decided on installing 3 separate metered natural gas boilers. They would be connected to the already Natural Gas meters located on the property that serviced the tenants cooking needs. We eliminated the continuous one loop and installed 3 loops, one for each tenant. The first floor received all new baseboard since we were in the process of renovating that unit fully. The second and third floors, we tapped into the existing piping and cast iron radiators located in their units from the basement.

We eliminated as much cast iron and copper we could from the basement and replaced it with Trac pipe for the gas supply and PEX for all the supply and return lines.

After Pictures of Boilers and Water Tanks:

Stratford 20121003 00112a

Stratford 20121002 00105a

I spent about $9-10k in just material and about ~$3k in labor. I also redid all the plumbing in the basement so hard to nail down the exact labor cost. I kept my boilers in the basement due to space constraints for the 2nd and 3rd floor. I also kept the existing cast iron radiators as I didn't want to intrude too much on the tenants currently living there.

Lets get back to the cost/benefit analysis, A typical water heater lasts 10yrs, and a boiler lasts 15yrs of course they may last many more years or less depending on maintenance.

COST = $13,000 to purchase and install separate heat and hot water units.
Benefit = $3,500 in oil savings annually.

Cost Benefit Analysis = 13,000/3,500 = 3.7 years for Return on Investment

In this case I would recoup my investment in about 4 years with equipment that should last me over 10 years. In fact I should expect about 4x or more benefit due to the typical lifespans of these units. Of course this required the upfront capital expense of $13,000. I was also able to satisfy external drivers such as the increasing cost of fuel to heat and provide hot water to the building. Lastly provide an amenity tenants desired which was control of their own heat. I surveyed the tenants after the 2012-2013 winter season to understand if they truly appreciated the benefit of controlling their own heat. I received very positive responses even though the cost of natural gas was shifted to them.


Comments