Incorporating Energy Efficiency Into Real Estate

15 Replies

Hi everyone, what are your thoughts on incorporating comprehensive Energy Efficiency upgrades into residential real estate sales and also investment strategies? For example, upgrading all lightbulbs to LEDs, appliances to Energy Star rated, as well as air sealing & insulation. 

- Have folks out there found that there is increased consumer awareness around efficiency? 

- Are there any members who have adopted a practice of installing (or recommending) high efficiency equipment for their units? 

Here are the barriers I typically hear: 

Home Sale:  Avoiding anything that might slow down a sale without significant return (e.g., add'l construction/rehab time). 

Investors: The landlord-tenant split incentive. Why invest in efficiency if tenants are paying the bills. 

For any local folks - I will be working with some home performance contractors in the Bay Area (Concord, CA Contra Costa County) to put on a networking event next Thursday 11/3 to discuss benefits and barriers.

@Alex Sloan great topic! I'm on the island of Kauai, Hawaii, where we have some of the highest electricity rates in the country. I've been looking at something similar where we effectively take over the electric bill for a property owner. We then install solar, high-efficiency AC, and LEDs and then have the property owner pay us directly for electricity, which is steeply discounted from what they're paying today.

We haven't done this yet. Still kicking around the idea. However, it seems like it has legs, especially here.

As for an owner of a rental property, we imagined them being able to tell their tenants that electricity is included in their lease. Sure, they'd have to raise rent, but it would be overall less than the tenant paying their own electricity today and means more revenue for the landlord.

Would love to hear from anyone with any sort of experience in a model like this.

Thanks again!
Greg

Hi @Alex Sloan ,

A buddy of mine recently had an energy efficiency person do a bunch of energy efficiency upgrades to one of his rentals at no cost to the him or the tenant, and no lien or anything else, and was able to pass the bill along to PG&E by way of magical wizardry. It was an easy sell to the tenant: 

"hey tenant want a bunch of free new upgrades to your unit? Cough up a paystub so I can show the wizard that you are modest income."

Are you one of these energy efficiency magical wizards? 

I could totally see a REI, or even a vanilla homebuyer, appreciating having an energy efficiency magical wizard along during the inspection, to tell the REI or homebuyer what old stuff in the property they can (& can't) fix or repair for free by way of passing the bill along to PG&E.

renters do not care about energy efficiency. they hear the buzz words and nod. but no one cares.

we put the spiral bulbs, program thermostat.

i will not buy LED's until they are cheper than spiral. soon.....

Originally posted by @George P. :

renters do not care about energy efficiency. they hear the buzz words and nod. but no one cares.

we put the spiral bulbs, program thermostat.

i will not buy LED's until they are cheper than spiral. soon.....

 They care about a new fridge and a new oven. They may not care about energy efficiency, but they care about "oooh shiney" and the landlord cares about "oooh lower utility bills." :)

@Alex Sloan

Great topic, doesn't come up too often!

I have a little experience with this on the buy-and-hold side.  I pay for all utilities in my rentals and have 2 homes with solar and 2 without.  I always upgrade the HVAC to a high seer rating to save energy and install double pane windows.  During the summer, my 7 bedroom runs the AC all day every day, had an electricity bill just shy of $1,000 (non-summer bill is around $250 - $300).  I have another smaller home up the block with 7 bedrooms as well but it has solar (paid for cash, not leased) and my electric bill comes to about $100 per month for the whole year.  It's a HUGE difference in my bottom line.  I'm all for energy efficiency and if I come across them in a property I am looking to purchase, I would pay a slight premium for it.  If the tenants were paying for the utilities, they might appreciate the added benefits, but I'm afraid they would only appreciate it AFTER paying a summer bill that's 3x the norm.

@Greg Horn - That's great to hear that it's on your mind; i'm a bit familiar with the energy situation in Hawaii, and understand that there are plans for some serious transitions now that the costs of renewables are coming down (they set a goal of being 100% renewable for the state by 2045). 

The concept of taking utility bills off the table for consumers and giving them one less thing to worry about could be a pretty strong selling point, though there is a huge wildcard for occupant behavior. If they aren't paying the bills, what's stopping them from leaving the refrigerator doors open to cool the kitchen! Since high energy bills are significantly more expensive in Hawaii though, perhaps it can be used as a strong selling point even if you have to jack up rents to cover potential overages.   

I am also curious if there are folks out there who have used efficiency/renewables to set themselves apart to attract tenants/buyers, even if it drives up the cost point. 

@Chris Mason , if only there were more wizardry money out there! I do play a role in implementing similar programs to the one you're friend's tenant probably enrolled in, but the ones that are completely free of charge are typically dedicated to low income. I definitely encourage folks to check out their utility's rebate programs to see what's out there. Also, having an energy analyst out during the inspection is a great idea. Better yet, try finding an inspector who is familiar with efficiency/indoor air quality - I'm sure there's a few out there. 

@George P. , thanks for the feedback - I agree that it's not usually on the minds of tenants. Though, there can still be some benefits for homeowners by having less maintenance on a home. For example, LED bulbs last for 30x longer than incandescents and about 4x longer than CFLs (spirals). Would be nice to screw in a bulb and know that you won't have to replace for 15-20 years and like you mentioned the LEDs are just about as cheap up front now.  

@P.J. Bremner - terrific! Great to hear of others who have taken this route. I have a few questions: 

  • Did you have these homes prior to retrofitting to see how expensive the bills were prior; what approach have you taken to estimate how much energy will cost each month. Do you add a flat $1,000 each month to rents and enjoy a $700 gain in off-months, or are you priced somewhere the middle to come pretty flat after aggregating? 
  • Generally, have you found that dropping the utility bills was an attractive feature to prospective tenants?
  • Do you keep an eye on smart meter data from the customers to see trends in their usage? 

@Alex Sloan

I house-hacked my first property by renting the spare rooms out, so I do room rentals.  When I moved out, I just kept doing that.  It's unreasonable to try to collect monthly bills from tenants, much easier as a landlord to collect 1 rent from each tenant that has all of these costs built in.

  • The first property did NOT have solar when I bought, I put solar up with one of the lease companies.  My annual energy cost for that house has gone down around $1,000 per year but mostly because the idiot that sold the system to me miscalculated the energy output.  I am guaranteed X amount of energy from my panels, for the last 3 years since I put them on have produced about 2/3 * X so basically they have to refund me that difference at the end of the year, which puts my investment in the black.  If I had to do it over, I would pay cash for the system, which is what I did for the most recent purchase.  Also, I remodeled my homes when I bought them, so I did not get a chance to check energy usage with old windows and new.  I suspect it wasn't a huge difference though.
  • As for the increase in rents to cover utilities, I didn't initially calculate it like that.  I let the market determine what was the MOST rent I could charge and get away with it and provide a much easier tenancy for my people.  The mortgage is about 50% of the total expenses, all other monthly bills combine to the other 50%.  If I only paid what landlords normally pay, it would be closer to 20% instead of 50%.  At the end of the month, I keep MORE net because I include the utilities, not less.  I have calculated it both ways, it's easier on me and easier on the tenants.  If they were traditional rentals, I would definitely make tenants pay. *Disclaimer to the noobs! :)*  THIS IS SPECIFICALLY FOR HOUSE HACKING!
  • Yes, it is appealing for them but more importantly it is much more manageable for me.  I have 6 - 7 tenants per house, chasing an electricity bill 7x, water bill 7x, internet bill 7x, is NOT gonna happen lol.
  • I used to monitor everything very closely, even had a wifi thermostat set up in each home so I could monitor what they were setting the temps to.  I have since then given up on doing that and just limit the summer time temp to 75F and winter 68F.  They can change it to whatever they want as long as it doesn't dip above or below those.  The reason the $1,000 month happened was because some @$$hole put the temp down to 66F during the 110F+ summer days.  I found out after the fact and swiftly corrected that behavior >:]  It's just one of those things that YOU as a business owner need to be aware of and prepare for.  I always keep 2+ months of reserve bills in each account to handle the big fluctuation months when they come.

I hope this helps!!

@George P. , you're a bit behind the times- the LEDs are quite comparable in price to the swirly bulbs, except they start up immediately(instead of warming up over a minute or two,) the light quality is better, they use 30-40% less energy for the same light output, and they don't contain gaseous mercury- so if they're dropped on the floor, the LED bulb doesn't require people to hold their breath while they open the window and pray that they haven't inhaled mercury. And as @Alex Sloan pointed out, the LEDs last way longer than the CFL(swirly) bulbs. Some last about 30 years during regular household usage- so it's "screw it in and forget it."

I pretend to be a landlord, but really I'm an environmentalist, or is it that I pretend to be an environmentalist, but really I'm a cheapskate who doesn't wish to fork over my money(or my tenant's hard earned money) to the utility company? I think I'm all three- landlord, environmentalist, and cheapskate. 

I write quite often on this subject, as I really enjoy spreading the knowledge on this point. I've recently begun installing 1.75 gallon/minute showerheads in every unit that turns over(they're very cheap on Amazon.com,) and have begun putting in a toilet that only uses .8 gallons per flush(it's called The Niagara Ultra High Efficiency, available at Home Depot.) Tenants have no idea I've put in either, but my water bills are coming down pretty sharply. I plan on writing a post quantifying the change, but I won't have enough data for another 5 or 6 months(I'm billed quarterly for water, and apples-apples can be tough when you've had tenant turnover,) so stay tuned. I will say one thing- your return here, if you have reasonable labor costs and normal water costs, will be better, percentage-wise, than you can do in a traditional real estate investment.(and if you're using 1.6(or more)gpf toilets, and 2.5(or more)gpm showerheads.) 

As far as LED bulbs, Lighting Ever(LE) makes a bulb that lasts for 50,000 hours, which is 30-40 years at regular household usage. Yes, dear reader, they may outlast you. They're about $2.25 each if you buy a 12 pack, I've linked them here

I install LED bulbs during tenant turnover for a few reasons. The tenants don't give a hoot when you tell them the lighting is energy efficient, but they will marvel at how inexpensive their electric bills are. Then when their lease is up, they'll say, should I really move out? I've never had such a cheap electric bill. And the savings tend to accumulate- tenants don't have to change their own bulbs(everyone loves that,) and the lower heat output of LEDs also reduces their air conditioning bill. It's also the right thing to do- each of these bulbs reduces carbon dioxide emissions dramatically versus the incandescent bulb, and also significantly versus the CFL. I always use these in common area fixtures- CFLs are so yesterday. I could go on for days about this, but I suspect anyone who's gotten this far is already asleep.

Originally posted by :

, if only there were more wizardry money out there! I do play a role in implementing similar programs to the one you're friend's tenant probably enrolled in, but the ones that are completely free of charge are typically dedicated to low income. I definitely encourage folks to check out their utility's rebate programs to see what's out there. Also, having an energy analyst out during the inspection is a great idea. Better yet, try finding an inspector who is familiar with efficiency/indoor air quality - I'm sure there's a few out there. 

 Hi @Alex Sloan ,

So what your competition is up to, and I'm letting you know because it could be good intel for you, is targeting landlords in B/C neighborhoods because they know that some huge % of time when they get a paystub from the tenant, they will be modest/low income. It apparently doesn't matter if the LL is high income, they use the tenant's modest income to qualify for the assistance program.

And then they do all the paperwork pushing for the landlord to make it super easy. Landlord gets 'free' home upgrades. Tenant gets shiny new stuff.

What makes it work is that your competition does virtually all the paperwork pushing, and then at the end they get paid by PG&E. "Sign here, here, and here, and we'll upgrade the property at no cost to you." 

Everyone wins.

Originally posted by @Michael Gansberg :

@George P., you're a bit behind the times- the LEDs are quite comparable in price to the swirly bulbs, except they start up immediately(instead of warming up over a minute or two,) the light quality is better, they use 30-40% less energy for the same light output, and they don't contain gaseous mercury- so if they're dropped on the floor, the LED bulb doesn't require people to hold their breath while they open the window and pray that they haven't inhaled mercury. And as @Alex Sloan pointed out, the LEDs last way longer than the CFL(swirly) bulbs. Some last about 30 years during regular household usage- so it's "screw it in and forget it."

p.

 ah i see... so you are saying that even though i can buy spiral bulbs for 50 cents, that's equivalent to the $2 that it costs to buy an LED. got it. 

also, are you planning on not going to the rental for 30 years that you are prepping to never change a bulb?

as i said, tenants do not care about it. i wont start using LED's unless they are the same price as spirals. true story.

Yes @George P. , you nailed it! I plan on changing a light bulb once, exactly once, and only once, and saving my tenants money so they can pay me more rent. Also giving them a better living experience with better light quality. I see that you're saving $1.50- but if you value your time, think about that buck-fifty next time you're screwing in that CFL after the last one burns out. While you're doing that, I'll be chilling on the beach.

If you don't get it, don't worry about it, you're not alone. My management often marvels at my motives. In fact I wrote about just such an episode in my book. You'll get the condensed version.

Manager: "Mike, why do you care about putting in insulation and making the place energy efficient?"

Me: "I want to save my tenants money so when their lease comes up, they stick around. That way, I save money too, and you don't have to show the place in one year's time."

Manager: "Aww, forget it, they pay the heating bill, don't worry about it."

Instead of causing a stir with management- which would cost me in other ways- I let management have it her way. Sure enough, the resident complained(ceaselessly, in fact) about the high utility bills, and left at the end of one year. Then I said, "Hey, let's make the place energy efficient so the next tenant doesn't harass you about their utility bills and maybe sticks around for more than a year?"

That's what we did- and our next tenant was there for four years, with nary a complaint about high heating or electric bills. Ahhh...the peaceful sound of silence. Ohh yes, it's so good. Shhh...don't bother me, I'm meditating.

Originally posted by @Michael Gansberg :

Yes @George P., you nailed it! I plan on changing a light bulb once, exactly once, and only once, and saving my tenants money so they can pay me more rent. Also giving them a better living experience with better light quality. I see that you're saving $1.50- but if you value your time, think about that buck-fifty next time you're screwing in that CFL after the last one burns out. While you're doing that, I'll be chilling on the beach.

If you don'

@Michael Gansberg

Once you understand the value of your time, things like LEDs become a no-brainer. In a 50 light bulb house, you paid $75 more than CFL. I consider that wise.

Don't worry about others quibbling over pennies. They have the same thought process for everything. At the end, you'll look back at a fulfilling and luxurious life, while they will still be driving a beater to Home Depot to buy replacement light bulbs on a Saturday.

There is a difference between smart investing and being a miser.

@Chris Mason - definitely a great tip and terrific opportunity for tenants and landlords alike. The trouble is what to do once the free money is all out. Like you and others in the thread have eluded to, without an immediate or well known ROI, it's tough to sell efficiency.

@Michael Gansberg I love the comments and example of your interchange with management. A hurdle in selling energy efficiency is that it is typically "invisible" (e.g., insulation, sealed ductwork) instead of sexy (solar, granite countertops). But there absolutely seems to be a potential advantage in enlisting happier tenants and reduced site visits. 

There has been a lot of work for years now to get an "efficiency score" on homes, similar to "walk score" you see on Zillow or mpg score you see on cars, though there has been huge blowback from many stakeholders. What are folk's impression on how this sort of criteria might play into the market? 

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