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

[Joshua Amezcua]

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!

[Joshua Amezcua]

But the house is beautiful and shows very well. I just have lived here long enough to know how miserable the summers can be both physically and financially.

[Henry T.]

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

[Joshua Amezcua]

Quote from @Henry T.:

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

 I don’t know why I found this funny but I laughed. I’m not sure if this is a good thing or a bad thing. I have the sprinklers set to a timer. Are you saying they will likely just turn this off? Or that I will be paying for it.

[Richard F.]

Aloha,

It really depends on the local market. My gut response would be to sell it, although this could create serious tax liabilities you would need to consider. Since it has not been a Rental yet, you can't 1031 out of it, although you still may be eligible to exempt a certain amount of gains. Check with your CPA for your specific circumstance.

IF, however, this is a relatively common rental property, in terms of lot size and overall quality, by all means offer it for rent, but DO disclose your average monthly costs for utils, and the AC limitation. Also be crystal clear on your requirements for lawn maintenance and irrigation, and consequences of not abiding. Perhaps one or two window AC's (if the electrical system can handle them) would be all you need to satisfy potential Tenants.

If you can land a Tenant quickly, and hold it as a rental for two years, we might see much better market conditions and you would be able to 1031 at that point, probably at a higher price. Depends on your view of the future in your market...

[Joe Villeneuve]

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]

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.

[Debbie C.]

@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.

[Henry T.]

Quote from @Joshua Amezcua:

Quote from @Henry T.:

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

 I don’t know why I found this funny but I laughed. I’m not sure if this is a good thing or a bad thing. I have the sprinklers set to a timer. Are you saying they will likely just turn this off? Or that I will be paying for it.

You got it. They will not pay to water your grass. That timer will mysteriously malfunction. Better you pay the water bill. But be careful, if your timer really does malfunction, your tenants wont notice or care until your yard is a dusty desert. They're too busy playing Skate 3 to worry about such nonsense.

[Mason Weiss]

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?

[Doug McVinua]

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.

[Noah Corwick]

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. 

[Joshua Amezcua]

Thank you all for these responses. You've definitely given me a ton to think on. On the one hand, paying for the updates to the property now, while costly, would be peanuts compared to what I'd be forfeiting in the long run. I agree though that in it's current state I can't see why a tenant would want to stay long term paying these higher utility bills. I imagine every year around mid summer I will get the same upset messages, asking me to either fix the water situation or give them a discount on the bill or cover it altogether. That, or I'll have turnover every year.

One thing someone mentioned to me outside of this thread is that I could potentially put the house up as short or midterm rental, and pay the utilities myself. The higher rent on a midterm rental would offset the cost of the utilities. That all being said, I still think my best two options are to either update the the A/C system and redo the frontyard landscaping or just sell the house. I don't love the idea of selling but that $150k should go a long way to helping us to get going on our invsting journey.

[Noah Corwick]

Quote from @Joshua Amezcua:

Thank you all for these responses. You've definitely given me a ton to think on. On the one hand, paying for the updates to the property now, while costly, would be peanuts compared to what I'd be forfeiting in the long run. I agree though that in it's current state I can't see why a tenant would want to stay long term paying these higher utility bills. I imagine every year around mid summer I will get the same upset messages, asking me to either fix the water situation or give them a discount on the bill or cover it altogether. That, or I'll have turnover every year.

One thing someone mentioned to me outside of this thread is that I could potentially put the house up as short or midterm rental, and pay the utilities myself. The higher rent on a midterm rental would offset the cost of the utilities. That all being said, I still think my best two options are to either update the the A/C system and redo the frontyard landscaping or just sell the house. I don't love the idea of selling but that $150k should go a long way to helping us to get going on our invsting journey.

A STR/MTR could potentially work. However, the AirBnB/VRBO space has dried up a ton in AZ. Scottsdale is a perfect example of this. If iconic places like Old Town are struggling with it, chances are it trickles down to you.

But if the numbers make sense, then they make sense!

[Richard Elvin]

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.

[Joshua Amezcua]

Quote from @Richard Elvin:

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.

I had not thought of this and it's not a bad idea, especially if I just use it in the living room where it tends to be the warmest even with the AC running cold. What I've decided to do is gut the front yard down to about 6 inches below the lawn and order 2-3 shades of rocks and do some pattern work plus some artificial turf in the center of each side of the pathway. It's a long front lawn, and the rocks will look pretty ugly if that's all there is, so I'm going to add a front porch/firepit area on one side and a pathway from the driveway on the other. This will help with curb-appeal and may add value in the long run. This will allow us to cut the water use in the front about 90%, only drip watering some small plants and a couple small trees. Not really the best look for a beautiful Tudor-style home, but we gotta do what we gotta do in Arizona.

As for the electric bill, I think I just need to go around the house and look for any inefficiencies and tighten them up. I'm going to have the A/C system inspected and tuned up at least and see if I can get another 5 years out of the current system. If that doesn't help, I'm just going to bite the bullet and upgrade the system. All in all I think it'll run me about $15k if I do the front yard myself and pay someone to help me with the A/C issues. After doing to math and remembering I have great credit, cash on hand, access to HELOC and HE loans, and access to the VA loan program I've decided I need to keep this property and do what I need to do to make it work as a rental. This house will be paid off in 15 years and easily fetch $1,000,000 by then as long as there are no major market crashes.