Thinking about Solar and Geothermal for 4plexes

26 Replies

Hello!

I will start by saying that my goal is to have enough cash flow to support my family if I didn't have a job.  To do this,  I obviously want to purchase more properties, but also make the correct investments in my current properties(3 4plexes) to increase cash flow and instant equity.

One idea that I have to do this is to look into renewable energy such as Geothermal and Solar.  Currently my tenants pay for electricity only and have window units in the summer.  By putting geothermal in, I would decrease their cost for AC and my cost for heating.  If I also put in solar, I could take over electric as well.  With this cost savings to the tenant, I could split the water and put trash back on the tenant as well.

Conservatively, I am assuming that this would decrease expenses by $250 a month, which would increase the value of the property by about 30K using a 10cap.

I am not sure how much either of these cost yet, but does it make sense to pursue this if the cost out of pocket would be less than the property value increase from the decrease in expenses?

Does anybody have experience with Geothermal or solar ROI?

Will Geothermal even work in a 4plex?

Thanks!

I have no experience with geothermal, but with solar, the only way I've seen to make it affordable is to do a lease. The problem with the lease is selling - good luck finding a buyer willing to take over you're solar lease. Plus, they have to qualify from the solar company. Oh, and then at the end of the lease, you own...nothing. 

I vote for @Russ Draper , split the utilities, have the tenants pay.

@Russ Draper -I am considering geothermal because my boiler is past it's life expectancy and, instead of getting a new boiler, I am looking into geothermal and paying for that for the tenant.  Otherwise, I would want to put in separate heat for each unit and put the cost on the tenant, which I assume would be comparable to the cost of geothermal, but not save money for the tenant, so rents will not be able to be increased.  I was thinking that if I am able to lower utilities for the tenant, I could market the apartments as "green" and potentially get more rent on top of this.  Conservatively, I am thinking I could get the utility cost to go down for me by $250 and rent increases by $50 per unit ($200/month) by going this route.  I am in the very early stages of researching geothermal, but does this make sense?

@Brad Starling -Thanks for the info on Solar.  I really appreciate it.

@Austin Davis

First check your zoning to see if geothermal (vertical well) is permitted and if there are restrictions to wells / lot or by acre.

Next, geothermal (the heat pump variety), where it is cost effective, has a lengthy payback.  If you are looking towards energy efficiency, you will get more bang-for-your-buck by improving the building envelope (air sealing, better insulation, improved doors and windows).

 Rather than install a geothermal heat pump(s), it may be cheaper to separate the units and install four smaller {gas} boilers - with perhaps a solar thermal array to preheat the return water and to supply domestic hot water - particularly during the warmer season so you do not need to fire the boiler.

I applaud you for considering these options. More people should be prioritizing energy efficiency!!  It's my impression that the geothermal units are quite expensive. I agree with what Roy suggested above though. Your money might be better spent improving the building envelope. But if you're considering *building* a 4-plex from the ground up, that's the time to factor in the geothermal and run the numbers to see if that system might make the most sense.

Austin,

I don’t know much about geothermal but I know it can be very pricey and solar is now more affordable but would still be a lot upfront based on your numbers and what your trying to do. I would be careful with trying to take over the electric bills as power usage is highly variable based on your tenants even if you use conservative numbers.

Start with the lower cost energy efficiency upgrades first and work your way up to the higher cost technology. There are numerous design and building practices that can be implemented to maximize your energy efficiency while keeping your costs low.  

Hi Austin,

It's so nice to see an investor considering the environment. As a rabid environmentalist, I applaud you. However, all of my discussions with people regarding geothermal retrofits have suggested payback times over a decade, which is simply abysmal.

You'll likely do better with solar power- I'd discuss it with a few of the big names in the industry(Solar City comes to mind, but there are many others as well.) I tried to put solar on several properties- one issue I ran into was that the electric service is seldom in my name, other than for the hallways/common areas, which didn't justify the cost of installation. The solar companies are figuring out ways around this, but the I deemed the hassle(and the small return on my time) to be too high a hurdle.

Some properties can benefit from the installation of air source heat pumps for heating in the winter and cooling in the summer as well- they typically look like large air conditioners. If your property is in Iowa, it is likely too cold for air source heat pumps to be very sensible. A state or two south, however, and you'd be very smart to install these- it would put the heating bills in the hands of the tenants, and would give them control over how hot or cold to make their apartments in the winter.

So now to the recommendations. If I were you, I'd install a high-efficiency gas furnace(they can reach the mid-90% range for efficiency.) If you're replacing an old one, its efficiency is likely in the low-mid 80% range. If you could break it into four zones(one for each apartment,) you might do even better- sometimes when you only have one or two zones(for four apartments,) the hottest apartment may crack a window to regulate heat, and that is money down the drain. The payback time you'll experience(you should calculate the cost as the difference in price for a minimum efficiency boiler(around 80%) and a high eff. boiler) will slaughter the payback time you'd experience with a geothermal retrofit.

But why stop with heating? If you're using incandescent lights(or even the swirly compact fluorescent lights,) you'll save a bunch of money and labor by switching to LED bulbs. This is especially true in common areas which may be lit 24/7. I've linked a 100 watt and a 60 watt replacement bulb below. These bulbs generally last for many years in an always-on state, or a few decades with regular household usage, and I recommend using them in your apartments even if you're not paying the lighting bill so that your tenants save money(and can pay rent more easily.) In an always on state, the payback for these(relative to incandescent bulbs) is usually under 3 months.

100 watt replacement: GE Lighting 13909 Energy-Smart LED 16-watt, 1600-Lumen A21 Bulb with Medium Base, Soft White, 1-Pack

60 watt replacement: Feit Electric - 60 Watt Replacement - Omni Directional - LED Dimmable - 3 Pack

And why stop with lighting? I've had great water savings on the installation of low flush(1.28 gallons per flush or less) toilets. I highly recommend using these, along with faucets with the WaterSense label(here's a link to aerators which accomplish the same thing without high installation costs. These things cost a few bucks apiece but can have pretty meaningful impacts: Simply Conserve Two Pack of Low Flow 1.5 GPM WaterSense Standard Faucet Aerators) You'll save on both water costs and the cost of heating the water as well. Low flow shower heads can be trickier- if your tenants aren't happy with the shower quality, they may become unhappy with their apartment- so be careful with low flow shower heads.

Finally, I'd make sure your insulation is up to snuff. If your attic insulation is degraded due to age, or has too low an R value due to lower standards from prior years, fixing that can have a very rapid payback time. 

After you've made many of these energy improvements, don't forget to let future tenants know that they're renting in a building with high-efficiency fixtures- the yuppies go wild for saving the earth and such(translation- cha ching!)

Best of luck!

 

Hey Austin, I had considered this for a rental property of mine.  The drawback is trying to convince a potential tenant that your rental is worth the additional rent.  If it were me, I'd rent a lower cost apartment and take my chances with the utilities.  If you are going to spend the money, I'd go with separating the utilities so that you can release yourself from that burden, increase the value to potential buyers (investors) in the future, and update the aging boiler.  If you need a "green" solution, maybe a tankless on demand model if you have NG.

Austin, 

If you do continue to research geothermal, I'd be interested in seeing the cost comparison you come up with. Could you post some actual estimates alongside costs for a high efficiency gas or heat pump system?

Like solar, the price may be coming down for geothermal, and it's possible that it's not as expensive as I'm thinking. Also, it's important to keep a long view. Solar PV systems had over a decade-long paybacks until fairly recently- now it's much lower in many states.  When the price of energy increases in the future (and you know it will),  solar and geothermal will both look like excellent long-term choices to have made. I'd love to learn about what early adopters have found out about the system's lifetime expectancy in different soils. I'd imagine that would have a great effect. A friend has a geothermal system at her house in Eau Claire, Wisconsin, and they've been happy with it as far as I know.  But this is a house they custom-built in 2005.

If you want to chat about providing green rentals to green-minded tenants, please reach out to me. I've been doing that for a couple of years and it's been working pretty well here in Madison. It'll depend on how big the green-minded market sector is in your town.

I have a fourplex in Marion probably similar to yours with window a/c.  I have noticed meaningful savings in common area electric cost in led bulbs and gas costs in insulation in attic.  At the same point as you are wondering how to save money the easy way - whether to keep dragging a gas/water old boiler along or switch to something cheaper?  Wonder about electic baseboard costs/ installation and keeping good tenants once you pass cost along in electric billl?

@Austin Davis , before you make any decisions, you may qualify for TAX BENEFITS for making the upgrades that will help to offset the cost or offset any income. Check www.dsireusa.org to see what local, state, utility, and federal programs that fit your situation. As far as payback goes, that really is a function of the utility rates and how often the tenants are using (abusing) the hvac. 

Another solution, is to stick with the same configuration but couple a high efficiency replacement with programmable thermostats. Work with your tenants on programming them, and that should result in a 15% to 25% reduction in energy consumption (depending on how easy the thermostats are to use and how often your tenants are home). If you have any questions, let me know or check out my website  to learn about ways to cut down on residential utilities. I am an energy conservation engineer by profession and a real estate investor. 

Upgrades to insulation will save you more than most HVAC upgrades. New geothermal systems are built really bad (hvac professional for 15 years) and will be high maintenance. They certainly can pay back where heating season is long, but not worth it for a LL. 

Solar will never pay off, the technology has been around for decades and cannot make sense without subsidies. Too expensive to install and maintain, it will break. 

The current ROI on solar, frankly, sucks. It sucks for the homeowner, and it double sucks for investors. The only exceptions are if you live in a SW state (loads of sunlight) that has significant tax credits to offset installation costs (they've mostly all expired as of 2016), and your local utility will let you install a net meter to sell back unused power to them (make sure they'll buy it at the same cost as they sell to you!). 

True, Tennessee is one of the worst states, but there are great states for solar outside of the southwest. The southwest is indeed great (except for Nevada)

NY, NJ, MA, CT, MD all are friendly to solar and have payback periods under 10 years for a 5 KW system.

@Charles Terrizzi and @JT Spangler

I presume you gentlemen are talking about photovoltaic.  Though todays photovoltaic panel technology is significantly better than a decade or two ago, it's still not cost effective in most North American jurisdictions without subsidization - this is really not surprising, most of our traditional form of energy were heavily subsidized until they reached a sufficiently critical density of uptake (some still are subsidized today).

My reference to solar above was for solar thermal systems to heat domestic hot water and/or provide space heating.  In the case hydronic in-floor/wall/ceiling radiation systems, solar thermal can provide sufficient heating on its own. in the case of hydronic baseboard systems, it can serve to preheat the return lines to lessen the load on the boiler.   Solar thermal system are very efficient and quite competitive with traditional methods of heating water.

I wasn't responding to you -- I was responding to the OP, who was asking about PV. 


Passive solar and solar thermal are indeed interesting options that can be much more cost effective.

Originally posted by @Roy N. :

@Charles Terrizzi and @JT Spangler

I presume you gentlemen are talking about photovoltaic.  Though todays photovoltaic panel technology is significantly better than a decade or two ago, it's still not const effective in most North American jurisdictions without subsidization - this is really not surprising, most of our traditional form of energy were heavily subsidized until they reached a sufficiently critical density of uptake (some still are subsidized today).

My reference to solar above was for solar thermal systems to heat domestic hot water and/or provide space heating.  In the case hydronic in-floor/wall/ceiling radiation systems, solar thermal can provide sufficient heating on its own. in the case of hydronic baseboard systems, it can serve to preheat the return lines to lessen the load on the boiler.   Solar thermal system are very efficient and quite competitive with traditional methods of heating water.

 The long term durability of even hot water heating is somewhat questionable in my experience. Although it certainly can be beneficial.

PV has been produced at least since the 1950s and has never been financially viable. It was discovered in the early 1800s. Not to mention the fact that it is extremely toxic to produce solar panels, therefore making large scale production bad for the environment we are trying to protect.

I have a solar panel for my automatic gate, it stops working in the winter when the sun falls lower and the days can get more overcast. So I guess I'll run some direct burial and hook up high voltage to that puppy. 

@Charles Terrizzi

We have two solar thermal systems in production - in a very temperature dynamic environment - and have experienced no durability issues.   The oldest system is 20+ years young and the only component to have failed and be replaced was the storage tank {which is essentially an domestic hot water storage tank minutes the electrodes or burner}.

Our experience has been the opposite.

I agree that photovoltaic panel production is energy intensive (lots of embodied energy there) and toxic (though there are recent advancements which are starting to address this element).  Solar thermal "tubes" on the other hand are fairly simple in design and easily manufactured (lower embodied energy) and there are non-toxic antifreeze options available today.

Hi @Austin Davis

This has been a pretty interesting thread, thanks for getting it started. I will simply say I do not think the investment in these upgrades provide enough of a savings for you (or an increase in rents) to justify the investment from a strictly financial sense. If you want to do them for the sake of environmental reasons, that is totally your prerogative. However, I do have some experience with these types of upgrades in a project I was involved with a few years ago.

My company gut renovated a 4 unit building for a CT Housing Authority to use as a model for upgrading the entire 162 unit project. We did a gut renovation including new bathrooms, kitchens, roof, plumbing, electrical, siding, landscaping and energy upgrades like energy star fixtures, natural gas HVAC, insulation, windows, etc. The total cost for the 4 units was $255k. Then the HA brought in an energy company from Michigan who convinced them they should go even further with the energy upgrades and include Geothermal heat pumps, solar PV and thermal. So we renovated the 4 unit building next door doing the same renovation as the first building, but with the additional energy upgrades. The total cost for the second building was just over $1M, with our portion of the budget being about $299k for relatively the same upgrades as before. The remaining portion of the budget was for the geothermal and solar systems for both buildings. 

How long does everyone think it will take to get a return on that $700k investment (before tax credits) from 8 rental units? 

@Austin Davis , you mentioned you have a boiler system (and I assume either baseboard or radiators). When switching over to a geothermal system this is a conundrum....are you sticking with some type of hydronic system or converting to forced air? (when considering an A/C system, especially in a humid summer environment, trying to cool with hydronic is challenging...think sweating glass of iced tea). If your units are small enough to get by on a window unit for cooling, you may be able to avoid installing additional ductwork to deliver heat and air conditioning. The other important point to remember with geothermal (as fancy as the name sounds) is that it's just a series of water wells. The same guys that come to drill a well for drinking will do your geothermal borings. In a place like Iowa, I'd imagine many properties have basements, and your water supply is coming into the building at least 6' feet below grade. In that sense, you already have a geothermal system....the water entering your building is likely in the 60 degree range +/- 5 degrees seasonally. The geothermal heat pumps are popular with folks that want to put up PV panels because they can heat and cool with electricity. 

To demystify all of the hype around geothermal (and make a more informed decision) the main thing to consider is this: Heating and cooling a house costs money between deltas ie: keeping your house at 72F when it is 0F degrees outside in the winter. Or in the summer, maintaining 72F when it is 90F and humid outside. If you're an investor....go where the money is: Winter! 

To echo what many are saying on here, it's just not worth it (as a landlord) to install a fancy system without gov't subsidy. Your best bet for cost savings and ROI for energy upgrades is to insulate and seal your house from air infiltration, BUT if you really want to install an efficient heat system go for a in-floor hydronic radiant tubes. Here's why: with your current boiler system we're dealing with the delta principal again....you're 'boiling' water to deliver it through a system that will achieve a 72F outcome. That takes a lot of energy! (...taking 60F water, making it 212F degrees, to produce 72F degrees) If you installed 'staple-up' radiant floor tubes under the floors of your units (assuming you have access to them via a basement or crawl space) you would only need to heat your floor tubes to about 80F or 90F to produce that 72F ambient air temperature. There are high-efficiency hot water heaters out there (like Polaris) that are about 95% efficient. So, you can spend $3500 on one of these 'boilers' to replace your old one and another few thousand on pex tubing, and see significant savings on your heating bills. There are also many DIY friendly suppliers out there (most licensed plumbers will charge a lot for this retrofit because they're not familiar with it).

If you still want to deal with the A/C....again, insulation and air sealing will get you the most bang for your buck, BUT for a fancy energy efficient upgrade you're probably better off pairing PV panels with a small cassette unit from Panasonic....skip the geothermal. 

Let us know what you end up doing!

Best,

Marc

Austin, I concur with the other posts.

There might be tax credits against your income tax that might make it worthwhile.  For geo and solar it looks like: 

Tax Credit: 30% of cost with no upper limit
Expires: December 31, 2016
* (Tax credits for Solar Energy Systems are available at 30% through December 31, 2019.
The credit decreases to 26% for tax year 2020; drops to 22% for tax year 2021 then expires December 31, 2021)

Details: Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify.

@Stephen Nierman  @Marc M.  @JT Spangler  

I want to thank everyone that has replied to this post the last couple months!  I am definitely not an expert and I felt my questions/input would have slowed the progression of this great post down, so I stayed out of it.

An update for what I have done so far:

I called our gas company and I took advantage of their free energy audit.  I found that 2 of my 4plexes definitely need attic insulation (which they will pay a large chunk of) and they will also provide programmable thermostats, light bulbs and low flow shower heads to all of the tenants.

I also called a local company that installs geothermal and even they said it would not be a good idea because they would have to take out the driveway to install it and there are other systems that they offer that are just as efficient.  I told him that 2 of my buildings have window units and a boiler and asked him what his opinion of the best option was.  He recommended a ductless "mini-split" system that would heat and cool the units.  He said that they are up to 98% efficient and are about $3500 installed (per unit).  The other option that he offered was to just get a new boiler.

Based on the comments above, I think I have given up on the solar idea unless it would be just for the common area electricity, but I am not even sure that would be worth it.  I think I could even bring down the common area lighting costs by installing some LEDs and I am considering putting washer and dryers into some of the units as a trial.  Figure this would be a perk for the tenants and at the same time, bring down the energy costs that I have to pay for.

I definitely want to split utilities and put that cost on the tenants, but I don't want to do that and get complaints that the bills are too high, so I want to make things efficient first.  My friend rents an old farm house and pays utilities and told me that they paid $500 last month for heat alone!  I wouldn't want that to happen for my tenants.

One last question:  Does anybody have any advice for the best way to borrow money for these types of upgrades?

Thanks again for all of your replies.  Once I start to get more serious about these upgrades, I might reach out to some of you.

Have a great week!