I’ll Never Buy Another Multifamily Without This $75,000 Tool That Added $1.3M Value in Less Than 12 Months

by | BiggerPockets.com

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.

Related: 12 Creative Ways to Add Major Value to Apartment Buildings

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?

Lesson Learned

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.

Related: How to Calculate the Value of Multifamily Real Estate

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.

We’re republishing this article to help out our newer readers.

How about you? Bought any real estate tools lately that returned a 17.7x multiple the first year?

Comment below!

About Author

Brian Robbins

Dr. Brian is a practicing Chiropractic Physician and a co-founder of Wellings Capital, a commercial real estate syndication company. He just finished his first book titled DONE! The Professional’s Guide to Double-Digit Returns, Multi-Generational Wealth, and a Worry-Free Retirement. His real estate experience includes single and small multi-family properties, as well as syndicating larger multifamily property and self storage assets. He currently owns a 32,000 sq ft commercial lease strip center which he is in the process of converting to a climate controlled self-storage facility.

56 Comments

  1. Tim Sabo

    Strong article Brian. I appreciate how you tied your efforts back to the value of the property: most people fail to see the value in doing something that may be seemingly unimportant-like the folks you bought the buildings from. On our on smaller scale, we have seen this same water and sewer waste, where tenants ignore leaky toilets for hours, days and weeks until our bill is through the roof. We install FluidMaster Leak Sentry fill valves which will not allow water to fill the tank if the flapper is leaking. We took this step because of a huge bill, and we are hoping it will help with leaky flappers and lazy tenants.

  2. Charlie Hyatt

    Brian, love the article. As far as the technology goes for metering gas usage, how does that work on central furnaces and boilers? Water is rather straight forward with flow meters but gas seems tricky. Are you measuring BTU’s somehow?

    • Brian Robbins

      Michael,

      I agree IRR is very important but we did not feel it necessary to run an IRR on this project due to the fact that the dollars (utility costs) saved in year one would more than pay for the entire cost of the project. It was a no-brainer… not to mention that the lower interest rate over the entire course of the loan would ease the pain as well. Thanks for the comments!

  3. Lamont marable

    I normally don’t read these but I was in my favorite spot at work, the bathroom, where I actually read this article. I usually listen to a podcast but this time I read an article. The title is what got me interested. I learned something and will apply it!! Thanks.

  4. Andy Le

    Great story Brian. I could not agree more on tenants responsibility to their utility and this approach can help investors/management save a lot of money by micro monitoring the unnecessary utility usages. Great post.

  5. Francisco B.

    @ Brian Robbins
    Great article. I have a similar situation with a single electrical meter at my duplex. I’m currently getting quotes on separating the meters to see if it makes sense to seperate them. I charge a flat fee every month. One tenant who always pays rent late purposely runs his AC all day to make up for the late fee. Last year I had to come out of pocket approximately $400 because of him. I’m kicking him out next year in March before we move in to house hack so I’m debating on weather I should do it now or when we are there.

    @Tim Sabo
    Thanks for sharing your experience with the fill valve.

  6. Alisha Decoteau

    Fantastic article Brian!!! Slapping my hands right now because I have not completed your book. I’m sure its just as good.

    I’m guessing that property management team was out the door!!

    Curious to know, was your company able to negotiate a lower asking price of the property since there was clearly a leak due to the excessive water bill that couldnt be pinpointed at the time of purchase?

    • Brian Robbins

      @AlishaDecoteau it is pretty common to change management teams when taking over a new property. We did not negotiate a lower price but since we were confident about the additional value we could create so we were able to bid a bit higher than we would have otherwise and won the deal. Unfortunately at this point in the market cycle most MF assets are being bid up to crazy levels so negotiating discounts is very unusual right now. Thanks for the comments!

    • Brian Robbins

      @KonstantinSamorodskiy the “green” loan is a designation that Freddie Mac has. If you agree up front to spend a certain amount on sustainable practices such as low flow shower heads and toilets, etc… they agree to lower your loan rate by a certain percent. You usually have to set aside the money and Freddie will follow up to make sure you accomplished the agreed upon changes. It was on our initial loan on this property.

  7. Jack Hildinger

    @Brian Robbins You needed a 75K smart meter system to suggest that the toilets were leaking?

    I’m just a lowly SF guy, but am I going to be the first to point out that one should expect the major source of the excess water use in a multifamily to be deferred maintenance?

    The $75K water metering system didn’t fix the toilet flappers and fill valves-your maintenance personnel did!

    I would have expected *every* toilet flapper to leak through and most of the float valves to malfunction. How do I know? Experience. I have around 35 toilets in my SF units. These are good for a year or two at best. So, upon this MF purchase, I would have tasked preventive maintenance of 5 units per day, 5 days per week. That’s 25 units per week, 5 weeks in a row till the toilets all stopped leaking.

    Instead you waited 4 months and spent $75K before attacking the problem. 1/4 of the year means you flushed 20K of water down the drain before you got resolution.

    Yes, now you can bill for the water usage. Yes, now you can find a leak immediately via email notification. I suggest that an appropriate preventive maintenance program would give nearly all the benefits with none of the outlay or annoying emails.

    I’d be pissed at my lead if I was syndicated with you.

    • Brian Robbins

      @JackHildinger Thanks for the feedback Jack. I agree that would have been a great idea in a perfect world and if those were our only problems. Initial triage pointed in a different direction…. Unfortunately this was a unstabilized asset with a lot of hair. We had a leaking pool, defective toilets, down units, trash furniture on the property, overgrown landscape, broken down fences, tenant problems, etc…Had to deal with the immediate fires first. Chose to get the property presentable and units turned first so we would have product available to rent number one. As I am sure you can understand this took maintenance staff quite a bit of effort to catch up but just one extra rented apartment at $825 per month paid for flapper leaks many times over. We went from 82% occupancy to pre-leased at 92% now on a 125 unit asset. Made our investors quite happy.

    • Brian Robbins

      @MohitAsthana I am not sure exactly how they came up with the $60 flat fee. They were doing that long before we took over. I would think that at some point in the past that the $60 may have been close to covering the utility bills but not when you are blowing thru 11 million+ gallons of water!

      Cheers!

  8. Rich Lopes

    Great article Brian! What I failed to understand is why you had to wait for utility company to tell you it was a toilet flapper issue and not the general inspection report. Although I am a big fan of Smart devices and Meters since I work for IONs competitor – I think toilet leaks are one of easiest issue a property inspect could have detected if I not wrong.

  9. Deanna Opgenort

    From my own home experience, if you aren’t looking for them, a flapper leak isn’t necessarily immediately obvious — they don’t always leak ALL the time. Sometimes it’s just on occasional “turn on. run 20 seconds, turn off” that really adds up.
    Why I love BP — you share this, & we all think “Hm. Maybe I should just plan to change all the flappers in my rental just to be on the safe side”.
    If you are wondering if there’s an issue you can always put some food coloring in the tank, & see if the color appears in the bowl before the next flush.

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