Splitting utilities as a value add strategy

[Kyle Frey]

Hey BP,

Im a new investor learning. My first multifamily deal will happen this summer and it looks like it'll be in the Portland Maine area where we will be living. 

I've been underwriting deals on the MLS as practice and for fun and I've learned that the difference between a good deal and a weak deal seems to be the difference of who pays utilities. Most of these deals seem to be landlord responsibility with a shared boiler. Although some are completely separated utilities.

I had a few questions: 

- Has anyone here split utilities as a value add strategy

- Am I correct in underwriting about $6k heat, $6k electric, $2k water for the average 2400-3000 sq foot multifamily?

- Would it make sense to buy a multi family with perfectly OK systems and still split utilities and install heat pumps?

- Any other thoughts on this?

When I underwrite paying all these utilities I'm getting about a 55% expense ratio and deals in the low 5% cap range. With utility responsibilities on the renter it gets closer to the upper 6% cap range. I'm a beginner and could be way off though. 

Thanks

[Dan Weber]

Hey @Kyle Frey,

All good questions. The big difference between multi’s in Mass compared to ME is that in Mass, it’s pretty standard for each unit to have their own heat system whereas in ME, it’s much more common for there to only be one heat system for the entire building. However, your electric assumption is pretty high. We usually have separately metered electricity. Water/Sewer is usually one meter for an entire building, paid by the landlord.

I do think it’s viable to split the heat costs via heat pumps, but it’s really going to depend on the condition of the rest of the building. Is there insulation between units? Is there insulation between the first floor and attic? In these old buildings, there is a lot of ways for heat to escape so if it is poorly insulated, then the heat pumps have to work super hard to keep the space warm. So it’s really going to depend on the building if that is a viable way to heat the building.

I don’t recommend separately metering water. When 99% of the buildings have the water paid by the landlord, if you are the only apartment that is trying to push that cost on your prospective tenant then it is going to put you at a disadvantage when someone has a couple of different apartments they are choosing between.

Feel free to shoot me a DM if you want to discuss in more depth.