What would you do with this property?

Question

I recently bought two 4plexes for a pretty sweet deal. 100k. Both are in a small town which is why I got the deal, and are mostly 1/1s. Both are converted SFH and have a single meter, so the old landlord was paying for utilities.

The rooms rent on average for 450 and utilities cost 150, so I'm bringing in 300 per unit. 3/8 are long term occupied and the rest appear to be transient/ month to month. I'm considering several options to improve cashflow.

1) Split meters and tenants pay utilities: this would be a huge boost, even if I just did electric, which is currently costing me 75 per unit. However I have read that splitting meters can be expensive, up to 5k or more per split. To split just 6 electrical meters I would spend 30k.

2) Improve efficiency to reduce utility bills. The houses are old (1900), and I feel some small changes like LED bulbs and solar panels could go a long way. Not sure what the long-term ROI is on these, though.

3) Convert to duplexes. It seems crazy, but if I were to knock down some walls, I could convert them to duplexes, charge $600 + utilities, and attract higher quality long term tenants. And I would only need to add 2 sets of meters vice 6. I could also do more value-add like fresh paint, professional photos, etc to raise the rent in a 2/2 situation where in a 1/1 I think it would be much less likely.

Your thoughts?

Jacob D Adamczak · Answer

LEDs have a really quick payoff and last a long time. If you are paying electric bills I would look to upgrade lighting and appliances ASAP

Theresa Harris · Answer

Ideally you make renos to increase the resale or income on a property.  Spend the money to get each unit on their own meter (or paying the utilities) and do small upgrades to each unit.  I would't spend a lot of money to only get the same income.

Tyler D. · Answer

Utility bill is 150 per unit. 450 - 150 = 300.

If I have 2 duplexes paying full utilities, that is the same income per month, plus they are more likely to attract long-term tenants.

Theresa Harris · Answer

If the 1 bedroom rents for $450 a month, why would you convert them to a duplex and rent them for $600??? You'd be making $300 LESS per month.  If you want to do renos, look at the existing units and see what you can do to those to increase the rent by doing simple and inexpensive updates.  Paint, change hardware on cabinets, etc.

I'd definitely look into getting the units on separate meters and billing the tenants for utilities.  If the cost to add individual meters is too high, then bill each unit separately.

Jacob D Adamczak · Answer

There is a happy medium, the energy star usage data is pretty easy to find if you look up the model online and it shows you a range of the energy usage of that model compared to the most and least efficient models.  You can get used or new ones pretty cheap that are in the upper half of the energy use spectrum.Insulation upgrades follow a path of diminishing returns.  If you have no insulation or little insulation, adding more really helps.  Once you have a decent amount of insulation, the payback gets longer for the more you add.  Just like above, you want a happy medium of insulated but you don't need to use the best/most insulation possible.  For the windows, that is a possible upgrade if they feel drafty but in my experience I would put that third after lighting and insulation.  It will make the room more comfortable but windows can be expensive.I am a big fan of solar depending on where you live and how much sun exposure your roof gets.  However, you should only consider solar after you do the energy upgrades.  This will enable you to use a smaller solar system due to less energy use and it is more costly to produce the energy via adding solar than to reduce usage by conservation/efficiency/insulation.  Most areas you will find a 5-10 yr payback on the solar array so as long is this is a long term hold and you have the capital, it is worthwhile looking into.

Tyler D. · Answer

I will definitely be swapping to LEDs then. For appliances, do I need the latest and greatest or is there a happy medium?

Also, what are your thoughts on solar panels, energy efficient windows and insulation upgrades?

Tyler D. · Answer

Thanks for the response Joseph.

The split is 1 2/1 and 7 1/1s.

Looking at the rent rolls about half the tenants are long term and half are month to month, so I want to entice them to stay.

I'm thinking a separate utility payment is the way to go. It makes the sticker price seem lower and more attractive to renters.

Joseph Garner · Answer

@Tyler D'Alessandro

First off, I’m a little confused. To clarify, you have 8 total units being 1BR/1BA?

I say the simple solutions would be to have a fix rate for the electrical in the tenants rent. Instead of rent being $450 with all utilities paid by owner, rent could be $485 with all utilities paid by owner.

$450x8=$3600

$485x8=$3880

Most tenants are used to paying own utilities, however some may enjoy just paying you for everything rather than have 3 different more bills coming in.

Best regards,

What would you do with this property?

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