Good House, Bad Investment – Worth the Oil to Gas Conversion?

6 Replies

Hello Bigger Pockets Community! I’ve been on the site for about a month now and have immersed myself in the forums and podcasts. I am a newbie multi-family investor in the Greater Hartford, CT area. I am grateful for the breadth of knowledge available on BiggerPockets. I just wish I knew to consult the site before I purchased my first “investment,” property, and so I present my dilemma….

Last year I purchased a two family home in Windsor, CT, a suburb outside of Hartford, CT. As intended I have rented out one unit and am living in another with my roommate. My share of the $1500 mortgage is $118 when all is said and done. I eventually would like to move out and rent both units, I’m estimating a $2000 income for both units. This all sounded so good going into the purchase…

The problem is all of the utilities are connected. I am currently paying for the electricity, water, and :gasp: oil heating for both units. While I would expect a landlord to pay for water, I am growing more and more distressed at the idea of paying for other people’s utility usage. I travel 2/3 of the year for work so I am hardly home, yet my average expense for heat/electricity is $400 a month.

I think the only way I can create a positive cash flow is to separate the utilities. This will involve an oil to gas conversion. Luckily the gas company will bring the lines to my house for free, but I will have to fund the costs to install the equipment. Estimates I’m getting have been in the range of 18k to 25k. I can make it work through a 0% financing program offered for high efficiency conversions and borrowing the rest from my 401k.

My question to you all is: Is it worth the additional investment? When I do the math using the conservative 25k investment for the conversion, plus my down-payment and closing costs of: $12,144.36, my ROI (considering monthly expenses) is 5% or a $155 positive monthly cashflow if both units are rented. While I wasn't expecting this property to be a big money maker, I am unsure if it is worth tying up my funds in a property that isn't giving me much of a return. I really do love this property and feel this could be a great place for me to learn but similarly I don't want to stay emotionally attached to a dud.

I’ve considered selling the property and starting fresh. I hesitate because I am pretty sure I overpaid and doubt there is much equity in it. I would be lucky to break even, the more likely scenario is I would take a loss. But the loss could give me the freedom to find a more solid investment.

The one thing I cannot do, is continue spending 5K a year on other people’s utility usage.

I would greatly appreciate any feedback, thank you in advance!

don't do it. include utitlies as a part of the rent. 200 a month per unit perhaps?....better than 25k for essentially nothing back.

@Ambur Fulse  

The one thing I cannot do, is continue spending 5K a year on other people’s utility usage.

If you are eating $5K/year in utilities, then 25K to separate them will have a 5-yr payback.

Another thing to keep in mind is those new gas furnaces should be high efficiency units (94 - 96%) whereas your older oil furnace is likely <80% efficient (maybe as low as 65%). Not only will you be burning a cheaper fuel, you will be consuming less of it, so the utility costs will go down ... this is good for the remaining time you are living in half and will make your rental more attractive when the tenants are paying their own way.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

Cut your losses and sell it. Just chuck it up to educational expenses.

Lesson learned: Be very thorough with your due diligence. 

Cameron Norfleet, Century 21 AllPoints Realty | http://www.CameronNorfleet.com

Thank you all for your responses. I'm still weighting the pros and cons of the conversion and considering other alternatives. I've thought about adding baseboard heating in the smaller apartment and just converting one unit to gas, although I  understand there is some aversion to electric heat by tenants because of higher electricity costs.

Cameron, being that you're in the same market area as me, do you have any experience with baseboard heating? Any idea of the cost to install? Is it a turn off to potential tenants?

Roy and Seth, what are your experiences with electric heating in your areas?

If nothing else this has definitley been a learning experience.

@Ambur:

Our home area differs from most in that the cost of heating with electricity is on parr with natural gas or oil.   If you take advantage of new technologies: thermal mass electric resistance heating elements or electric air-2-air or ground-2-air heat pumps (especially ductless units with split heads), electricity can actually be cheaper.

We have no oil heated properties and whenever we pursue a property heated with oil, we determine the cost of converting it to natural gas or electric and bake it into our analysis.  On residential units (i.e. SFRs & duplexes) tenants cannot always be trusted to keep the oil tank filled.  On multis, we just do not want the liability of having that much fuel oil / diesel sitting on the property {several of our properties are in, or adjacent to, a City well field}.

We have two buildings remaining with natural gas heat ... one we are in the process of converting to electric (ductless heat pumps with auxiliary electric resistance heat), the other will remain gas for the moment.   Though we produce a lot of natural gas in the Atlantic provinces, most of it is exported to New England under long-term contracts and we actually pay more for the gas than folks in Boston {one of the more silly effects of NAFTA}.   If natural gas prices here were comparable to other parts of the continent, we would likely use more of it.

Electricity is by far the most convenient fuel and can be cost effective if you are using heat pump technology (either ducted or ductless).  The building code will still require you to have auxiliary electric resistance heating (in-line if you are using a ducted system, typically as baseboards if you are not).

In areas other than Atlantic Canada, gas is frequently the most cost effective fuel for heating.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

@Ambur Fulse   hey!  I would get those quotes redone for the conversion.  I have nat gas in front of one of my houses and we literally(3 weeks ago) just had some quotes done for the conversion.  Highest was 12K and this was all in.  MA also does MassSave which allows a 0% rate for a loan to do the conversion, CT may have this same thing.  Reach of to CT DEEP and ask.  There may be some tax benefits.

As a quick fix have a home energy assessment done(should be free) and find out if a few hundred dollars of insulation could help keep heat in.

My .02 here!