Energy inefficient houses with lots of grass \ok to be rentals?

Question

Hello!

I am finishing up the last of the rehab/renovations on my primary residence. My wife and I are trying to decide if we want to rent our our current home or just sell it and roll the $150'ish thousand into buying a couple rentals. We can buy another primary residence for ourselves with $0 down using VA home loan. Rates are high, but we have good income and could always VA IRRRL refinance when rates come back down.

The cashflow on our current home would be about $800 a month, managing the property myself. But I have some worries that my house won't be a "good rental" due to how expensive it is during the summer.

Electric bills around $500-600 when running air on 78. It simply doesn't turn off all day and honestly it's not comfortable because it never seems to actually get to 78. It's a two-story house with a tri-level living room. We've had the A/C tuned up so it's running as efficiently as possible, but we would have to upgrade the entire system and further insulate the entire house to make a significant impact. One company quoted me about $20k for this. That's a huge out of pocket expense.

Additionally, our water bills are around $400 as the house has huge grass lawns in the front and back yards. We water every other day and I installed low-flow sprinkler heads but still it's just a lot of grass. There are 7 total zones. This was initially intended to be our forever home, so we landscaped with the kids and pets in mind. Most rentals we see are just rocks front and back. We could replace one or both yards and do turf or rocks, but again that's another massive out of pocket expense.

We would have the tenants pay the utilities. But I'm imagining some angry phone calls and emails when they get the $1000 combined utility bills. I'm sure we'd have to tell them up front. I don't know it's just a weird situation and I'm not sure what to do. It would cost around $30k to get one of the yards changed out to hardscaping and upgrade the a/c and further insulate. I'm sure if I do a long term cash on cash analysis it would be worth it, but looking for advise before we proceed.

Note - this thread posted before I was ready to submit so I've had to make a ton of edits!

Joe Villeneuve · Answer

Sell it.  Think like a tenant, not an owner now.  As an owner, you'll put up with the high electric and water bills because you have to.  A tenant has nothing invested in this house, neither money nor emotional.  Only costs.  How long to you think a tenant will stay in this house?  You'll constantly be coming up against vacancies, and when that happens, guess who'll be paying those AC and water bills?

If you sell it and can walk away with $150k, do it.  Then put that equity to much better use.

Theresa Harris · Answer

I'd sell it and use the money to buy rentals.  You will also have capital gains to pay if you use it for a long term rental.  Better to buy something that you know would work well as a rental.

Mason Weiss · Answer

If you sell it, you are already looking at 5% realtor commissions which might be substantially more than taking out your grass and putting in something more rent friendly. At that point, you are just dealing with a high AC bill which most Arizona renters are aware of especially in the summer months.

You won't find $800 of cashflow in other properties right now due to the interest rates, so it might be worth trying to rent your current property and then using your VA loan for a new primary.

If renting your current home does not work out after 1 year with a tenant, you can execute your next strategy which would be to sell it and use the equity elsewhere. At this point, why not first see if you can make this a great cash flowing rental?

Debbie C. · Answer

@Joshua Amezcua

I have SFH's in Scottsdale, we have removed all grass and re-landscaped. We knew the houses we purchased would be long term rentals for us, so we planned accordingly. Tenants will complain if the water bill, or electric is too high. And YES in Arizona tenants want a cool house in the summer and expect the A/C unit to keep them comfortable. Most of my tenants keep the thermostat at 78, however, some tenants want the temp lower than that, and we get a few complaints each summer if they think the A/C should cool the house to say 74 degrees when it is 113 plus outside.

I agree with Joe and Theresa, I would sell, then look for rental properties that will fit your criteria that tenants will be competing to rent and want to stay long term.

Richard Elvin · Answer

I'm kinda late to the party, but have you looked at adding a mini-split for the LR? Super efficient and could be used for additional cooling in the heaviest use area.

Noah Corwick · Answer

Not to beat a dead horse, but I would agree with many others in this post and think that selling it would likely make the most sense. Renting it out will be a tough sell + the likelihood of tenants renewing past the first term might be lower than you'd like it to be.

With all the improvements that you've been putting into the home, you'd be able to reap the benefits on the market and plan strategically for your next investment properties.

Doug McVinua · Answer

1. Thank you for your service!

2. Have you considered the Tax Credit (Capitol Gains) for selling as an owner-occupied property? In many scenarios, an owner-occupied will have a $250,000 capital gains exception or $500,000 as a married couple available.

3. Your current property doesn't sound like a great rental. Many/most tenants will not care for the grass like you do and will cut the water drastically once they get the first bill. The other issue is the HVAC; unless it's a large house, the tenants will be very unhappy and not likely to stay long term (beyond one year), causing you regular turnover expenses.

Given the above, you might be better off to sell this one and buy a better rental property.

Henry T. · Answer

Don't worry, the tenants won't be watering the grass. Could you add some solar to absorb some elec costs?

Energy inefficient houses with lots of grass \ok to be rentals?

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