OK, I’ll admit it. I’m a tool guy! Yes, I can wander in Lowes or Home Depot for hours at a time drooling and dreaming. I don’t ever have to have a reason to buy a new 18v DeWalt drill set. I mean, you never know when your current drill will break. The only thing that could be better than a new tool is a new tool with technology, right?
My company recently closed on a 125-unit town-home deal in Lexington, KY. At the time of our purchase, the previous owners paid for all utilities for the tenants except electricity. Instead of collecting the actual charges, they simply required the tenants to pay a flat fee of $60. This fee included water, gas, trash, and pest control. The tenants were only responsible for their own electricity. Since the water and gas were not individually metered, on the surface it seemed like a flat fee was a good way to collect fees. In reality, it turned out to be a terrible plan. We noticed during our evaluation of the property’s T-12 that the cost of water and gas alone came in at $160,000. Unfortunately, the property owners were only collecting a total of $80,000 in fees from the tenants. This one item resulted in a loss of over $80,000 for their ownership team.
As we dug in more, we found that the year prior to our purchase, the property used a total of 12 million gallons of water. With 125 units and the property’s occupancy averaging just under 90%, the water used per occupied apartment equated to 107,000 gallons. We spoke to Ion Energy Solutions, a smart metering company out of Louisville, KY. They informed us that this was approximately twice the expected consumption for a property of similar size and occupancy. We were told that there was most likely a good sized leak which would be relatively easy to pinpoint using their technology.
When laying out the underwrite for our investors, we detailed how we would attempt to recapture this terrible waste of money and resources. In our talks with Ion, they assured us that with the installation of their wireless smart water meters, we would save millions of gallons of water. They also offered wireless smart thermostats that we installed as well.
The Real Work Starts
Once we had a signed purchase contract, we were able to perform thorough on-the-ground due diligence. We questioned the site manager about the excessive water usage, and she casually mentioned a leak in the pool. Upon further questioning, we learned that the pool water level dropped eight inches each and every day. I asked what they had done to fix the problem, and she told me that they dragged the hose out every morning and filled the pool back up again—as if it were no big deal!
So, it appeared we had found one of the big leaks. The biggest question was how much it was going to cost us. With hard money down, we were already committed to purchase the property regardless. There was no turning back. Unfortunately, it was November, the pool was closed, and we couldn’t get an answer until spring. We had a good suspicion that the leak was along the top edge of the pool somewhere. When spring came and we finally opened the pool, we called in a local company. They revealed that there were leaks in all of the skimmers. The eight inches of water lost per day were resolved for less than $500 dollars. Problem solved, right?
But wait, why was our water billed still jacked?
After some unexpected post-closing headaches, we finally contracted to have the smart meters installed. Unfortunately, no one, including the utility company, could locate the shut-off valves for more than one-third of our buildings. Due to the unexpected delay, the project dragged on for more than four months and the high water bills continued. Once we finally got the system up and running, it was eye-opening. The reporting capabilities and ease of use were astounding. I was able to log in to the site and look at a number of reports documenting the water usage for each apartment and for the complex as a whole.
It’s an understatement to say I was surprised by what we found! We did not find one or two big leaks, but a handful of defective toilets and tons of defective toilet flapper valves. In fact, as many as half of the toilet flapper valves in the entire complex were non-functional.
As the whole system came online, I began to receive alerts on my email and cell phone each time an apartment used more than 60 gallons of water in one hour. I would get as many as 25 alerts a night. We found that one faulty flapper could leak as much as 5,000 gallons of water in a single 24-hour period! We sent our maintenance crew out on new search and repair missions each morning, guided by the alerts I received the night before. Slowly but surely, we hunted down all the leaks.
What we thought was going to be one or two major repairs turned out to be hundreds of small repairs. Because the tenants had no skin in the game (to conserve) they would leave their toilets running for hours, if not days, at a time. Without the smart water meters, we would never have been able to find all of the leaks.
The Bottom Line
Now that we have the leaks under control, we are beginning to transition new and renewing tenants to direct billing of their water usage. Those who are careful about their usage should be able to reduce their utility costs. Those who abuse the situation will now get to pay for their abuse. With the transfer of billing responsibility back to the tenants, our ownership group will be able to bring a huge uncontrolled expense in line.
We will be able to pass these savings directly on to our investors, and the strategy has paid off in another tangible way as well. This individual metering system qualified us for a “green” loan from Freddie Mac. The installation of this system dropped our loan interest rate by 20 basis points. With the savings on the interest rate, we were able to offset the expense of the metering system, which was a win-win for all.
In retrospect, about 75% of the shortfall in utility payments were directly related to water and about 25% was related to gas expense. Our smart metering system also included smart thermostats. We intend to begin to bill back the tenants for their gas usage in the fall, and that will complete the savings of $80,00. I will update you on our experience with the smart thermostats once that transition is complete.
After seeing firsthand the tenants’ lack of motivation to conserve, I was appalled. I quickly determined I would never buy another multifamily property without the ability to bill individual tenants for their own utility expenses. The smart system has done exactly what we had hoped! And if all of that was not enough to convince you to do the same, let’s take a look at the value proposition. A whopping $80,000 of recovered utility expense will be added to our NOI. That $80,000 when divided by a 6% CAP rate upped the value of our property by $1,333,333. Not a bad take considering the smart metering system cost us just under $75,000 all in.
In less than 12 months, we will have turned a $75,000 investment in smart metering technology (which was mostly offset by a lower loan rate) into $1.33M of appreciated value. We also expect it to be good for the planet, saving between 4 and 6 million gallons of water in the process.
How about you? Bought any real estate tools lately that returned a 17.7x multiple the first year?