Multifamily- Prorate or switch from boiler to electric heat

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Multifamily- Prorate or switch from boiler to electric heat

Dave Reeves
Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
I recently purchased a Multi-family 4 unit that currently has a new gas boiler. Property managers in my area are telling me to eliminate the boiler and install electric baseboard heat in the units and have the tenants absorb the expense through their own electric bills instead of supply on the house.
  1. What are your thoughts on this approach?  
  2. Would prorating from the utility company on an Equalized Bill based off historicals and leaving the boiler/system in place be a better strategy?  
  3. I'm worried about fire risks with baseboard heat, meaning that tenants would need to be knowledgable about drapes, bedding, furniture, etc being in close proximity to the baseboard units. 
  4. It's an underperforming property, so any fair strategies to eliminate expense and pass on to tenants to make them accountable I am wanting to do. Currently my thoughts are as follows:
    • 4 stall detached garage (solution:  charge $50 per stall)
    • Add coin laundry (solution:  ~$1200/yr)
    • Raise rents to market area  (past owner hasn't raised in 12 years)
    • Optional fit out for 5th unit that is currently used as owner storage
    • 4 separate storage units in basement that are in use, but not being charged for
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Luc Boiron
Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
10y

I'm not sure what the regulations are in your area, but where I am, you can't start charging tenants extra for heat if it was included when they started renting. You could charge for new tenants.

Here in Ontario, if you wanted to, you could estimate how much the heat would cost them, reduce the rent by that much, and have them pay the rent themselves. Obviously, this nets out, so doesn't make much sense.

I would absolutely recommend you stay on the gas boiler. It is significantly more effective. I wouldn't just be worried about the risk of fire, and the cost of installing the baseboard heaters. You could more than double the heating costs of the property by switching from gas to electric heat. 

I think the key here is to increase the rents when you can. Tenants tend to pay more for a space where heat is included, rather than one where they need to pay heat on top. And at least in my market, units where there is electric baseboard heat and tenants pay the hydro have significantly lower rents. Keep including the heat, and make sure it's clear in your advertising for units that heat is included. Price accordingly.

Your other ideas seem great. be careful taking something away from a tenant that they had for free and trying to charge them, such as the basement storage. If they were allowed to have it when they moved in for free, you might be better off just charging new tenants when they move in rather than existing tenants.

Good luck!

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  • Luc Boiron
    Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
    10y

    I'm not sure what the regulations are in your area, but where I am, you can't start charging tenants extra for heat if it was included when they started renting. You could charge for new tenants.

    Here in Ontario, if you wanted to, you could estimate how much the heat would cost them, reduce the rent by that much, and have them pay the rent themselves. Obviously, this nets out, so doesn't make much sense.

    I would absolutely recommend you stay on the gas boiler. It is significantly more effective. I wouldn't just be worried about the risk of fire, and the cost of installing the baseboard heaters. You could more than double the heating costs of the property by switching from gas to electric heat. 

    I think the key here is to increase the rents when you can. Tenants tend to pay more for a space where heat is included, rather than one where they need to pay heat on top. And at least in my market, units where there is electric baseboard heat and tenants pay the hydro have significantly lower rents. Keep including the heat, and make sure it's clear in your advertising for units that heat is included. Price accordingly.

    Your other ideas seem great. be careful taking something away from a tenant that they had for free and trying to charge them, such as the basement storage. If they were allowed to have it when they moved in for free, you might be better off just charging new tenants when they move in rather than existing tenants.

    Good luck!

    2Reply
  • Dan Kelley
    Rental Property Investor · Leander, TX · Member since 2015 · 89 posts · 51 votes
    10y

    I'm currently considering the same move on a 6-unit building I'm closing on in just over a week.

    I've actually been looking at Cadet electric heaters instead of traditional electric baseboard heaters. My understanding is that the baseboard heaters are terribly inefficient at disbursing heat throughout a room because they rely solely on convection, whereas a Cadet heater has a built in fan, yet is no louder than when a forced air furnace is blowing through the vents. They have options for the heaters that look just like a register for central air, and they have them in many different wattages.  If I do end up using the cadets, I'll likely put a large one in the main living space and then a smaller heater in each of the bedrooms. They can be daisy chained to run off of one thermostat or can have individual unit-mounted thermostats. Check out my recent posts and you'll see a thread  I started on this same topic. Several people gave some great advice and input on the subject.

    0Reply
  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    Thanks Luc!  I absolutely agree with your statement about taking things away from current tenants ( I don't want to do that). To clarify, my comments would be for new tenants moving forward. Although, sometimes that is tricky as well, due to the fact that all of them live very close to each other and typically have tendency to talk.  Have you ever purchased an underperforming property and tried to improve? Was it easier to rip the bandaid at once with month-to-month, or ease into transition over time?

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  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    Thanks Dan - will do!  

    I have experience with Mitsubishi split units, but currently the tenants provide their own AC window units. So, I thought just providing a heat solution that the individual renters have to pay for might be the way to go. I will look through your threads and see what's there. Thanks again! 

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  • Dan Kelley
    Rental Property Investor · Leander, TX · Member since 2015 · 89 posts · 51 votes
    10y

    @Dave Reeves Maybe I was a little unclear- The Cadet heaters are heaters only. No A/C built into them at all. They're just a little box unit that mounts in the wall and provides heat only- NO A/C. Just wanted to make sure I clarified.

    I also was checking out the split-units but it seems to me that they would probably under-perform in the -20*F Iowa winters. That's what prompted me to check out the Cadet heaters. They're sold in most big box hardware stores.

    0Reply
  • Chase Keller
    CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
    10y

    We have converted several of our small multifamily from boilers to electric heat.  One 4-plex we converted to all cadet heaters.  There is little risk for fire, even with the lower intelligent tenants.  I was concerned at first, so I took one of them, put a kleenex inside and pushed it all the way into the metal heating elements.  Turned the heater to its highest setting and let it sit for the next couple hours while I painted a couple rooms.  Pulled it out, it was hot, but not burnt at all.  I'm very happy with them, and the tenants seem to really like them as well...  Ive been using them since 2010 without any problems.

    We have some units that have both a PTAC unit as well as cadets.  They are more expensive, but nice to have AC without the window air units.  Tenants really like those as well

    1Reply
  • Samuel Sedore
    Real Estate Agent · Kitchener-Waterloo-Cambridge, Ontario · Member since 2013 · 408 posts · 90 votes
    10y

    Maybe it's because our electricity costs are much higher in Canada, but I would fire that property manager his idea is absurd. Taking on a huge capital cost to avoid a small monthly cost that is also a very tax friendly write off.

    Boilers are one of the most efficient sources of heating, you could likely gain higher returns by charging slightly more for all inclusive units.

    Just my 2 cents, from an out of market investor. Our hydro costs have increase over 40% in the last 5 years though. Tenants realize this as well and favour inclusive units

    2Reply
  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    Currently, the way the former owner had things set up, heat (gas boiler) was not being charged for. I rallied in some areas this in typical, in others not so much. An annual gas bill servicing only the boiler is $1400+ which is not being recouped from the tenants. Does it make sense to just leave this system in place, increase rents to cover or prorate out among the four units evenly, OR, just cap things off, install Cadet units or something similar? Then, the tenants are paying on the "you use it, you pay for it" plan.  

    Regardless of either direction, this is a long term plan so I want to get it right....

    0Reply
  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    @ Chase    

    What Cadet models are you guys installing? Looks like several to choose from... Just curious...

    0Reply
  • Charles Morgan
    Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes
    10y

    $1400 is a big expense, is the boiler well maintained? I personally would prorate the expense to new tenants as they move in, as @Luc Boironsaid, the boiler is still more efficient than electric.

    I actually put in small vent-free gas heaters in a property. If you did that, each tenant could pick their own comfort level and the boiler would be a backup. The ventless heaters work even in a power outage saving you from worrying about frozen tenants in a winter storm. I prefer the radiant heaters for comfort but I have put in two ventless fireplaces which gave me a selling point. Ventless heaters may not be legal in your area but that is rare. Usually they are allowed if they are used as a "supplemental" heat source. Ventless heaters in my 2880 S.F. home dropped my gas bill from $175/m to under $125. (desert southwest area) And I have heat even in a power outage.

    1Reply
  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    @Charles Morgan

    $1400 annually, but as I try to get an underperforming property functioning well, $100+ a month here and there adds up and really makes CoC start to look good. I like the idea that Chase was discussing. If I could install units that both do AC and heat, eliminate boiler expense, then the tenants are 100% responsible for their own comfort setting.

    I would still need heat in basement for laundry/storage I suppose, so that's something to think about. I know a lot of guys regulate down the boilers so they only heat to a set point, but that tends to cause phone call complaints. This is a tough one...... What to do, what to do!?

    0Reply
  • Luc Boiron
    Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
    10y

    @Dave ReevesNot all tenants are geniuses, but most aren't stupid. If a tenant is looking at comparable rental units, but one they will need to pay the heat, and the other not, they will discount the unit where they need to pay heat.
    If the unit with heat included would rent for $1,000, and it will cost $100/month in hydro to heat, the tenant would normally be willing to pay $900/month or less.

    If the gas is costing you $1,400/year now, it will likely cost $2,000+ per year in hydro to heat. You will pay for a significant portion of that expense through reduced rents you can demand from tenants, as your property will be less attractive. So you might save $1,400, and lose over $2,000 in lower rents. Sounds like a bad deal to me.

    At least where I am, gas costs 1/3 of electricity to heat with. The existing rents for the units might already reflect heat being included. You might get lower rents without it.

    I have found tenants much more willing to pay for heat when the heat comes from gas, because they know it will cost them much less.

    If you are worried about the tenants wasting heat because they aren't paying for it, then sure, prorate the gas to the tenants. But don't change to electric!

    1Reply
  • Dave Reeves
    OP
    Cincinnati, OH · Member since 2013 · 10 posts · 0 votes
    10y

    @Luc Boiron

    Well said, my friend!!!!

    Side note: my mother was born and raised in Kitchener and naturalized her citizenship in the US later in life. I'm working with a client in Markham and will be up there in a couple weeks. I haven't been there in 10 years. Anything I should check out or see just for fun. Cheers!

    0Reply
  • Luc Boiron
    Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
    10y

    @Dave ReevesIt should be interesting when you come up to Markham. I grew up in Thornhill, which is technically part of Markham. That area has had a huge influx of Chinese (mostly mainland) immigrants in the past 10-20 years, and the population is almost 50% of Chinese ethnic descent. Not to mention people from other countries and cultures.

    Some say Markham is the best place in the world to eat Chinese food outside of China, and I would agree!

    Also the immigrants have bee n bringing in foreign money and buying up property, which has increased housing prices here like crazy. Homes in many areas of Markham are over $1,000,000 now, and this is the suburbs! Some tear down lots are selling for $1.5 million in Thornhill. Crazy times. Enjoy the trip!

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    10y

    Electric is expensive here and I get a lot of complaints on cost so I would go with gas any day but it isn't available.  All the retrofitting would be a pain and you need to consider with the electric you have   electric to support switching all units or do you need to also upgrade electric service?  You may have to for minisplits and I think that is the best electric option since you can advertise AC but it is more units to maintain.  

    There are things I would change first. Temperature control thermostats that have a max,  we use a  landlord stat from Chicago temperature control. It returns  to 68 two hours after they set it up. Max temp is 70.  Raise rents,  advertise the free heat to get a better rent.

    I like your other ideas but check if their leases are silent on the extras they get now or if they are mentioned as included. For garages check local storage unit rates and garage rates to see if the price is right that you propose. 

    Investing in the building envelope will help with heating costs but if you want to switch to tenants heat take a look at how long it will take to recoup the upfront cost especially since you have a new gas heat. Might try to get the rents up first.

    1Reply
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