Need Advice on Separating Utilities
zI am new to the forum and was glad to hear about it. My question is this. I have a 3-family house and I am interested in converting my heating system from oil to gas and separating out the utilities for each unit, so that each tenant will pay for their own heat and hot…
zI am new to the forum and was glad to hear about it. My question is this. I have a 3-family house and I am interested in converting my heating system from oil to gas and separating out the utilities for each unit, so that each tenant will pay for their own heat and hot water. I really like my tenants and am asking for advice on how to fairly change the terms of a lease so that they are okay with paying for their own utilities. (e.g. How much would I need to lower the rent? How would I convince them to take on this “risk”?)
I bought a three-family house six months ago and have two tenants that have moved into in the 1st and 2nd floor units and have been living there for three months. Their leases will both expire on Aug 31st and a new one-year lease will be issued on Sept 1st. (This is because I wanted their leases to coincide with the rental season and not be stuck finding tenants in early Spring). The expectation when they moved in was that the rent would not go up when the new lease would be signed in Sept.
Both units are 1-BRs (about 625 sq ft) and I estimate that during the colder 6-months of the year heat will cost $150/ month to heat each unit (or $75/ month on average for the year). Also, we plan on insulating their units with blow in insulation at the same time the new heating units are installed.
Do you think this is reasonable? Do you think it is too much to ask of them to change the lease after three-months? Do you think it would be offensive to them or would they be amenable to paying their own utilities if the rent was reduced?
Any advice would be appreciated. Thank you!
Thanks to all who responded with advice. Just to be clear, each tenant’s lease was for just 4 months and each is set to expire at the end of next month (August 31st). Legally speaking I need to give 30 days notice before making any changes to the new lease (e.g. lowering rent and asking them to pay for own heat) before they have to sign it on Sept 1st. I propose to insulate their units while reducing their rent by $75/ month so that they would pay for their own natural gas bill for cooking, heating and hot water.
I like the idea of doing the conversion and then documenting the cost of heat with the new system for 12 months before asking tenants to take this on. However, the only problem is that they currently pay for their own cooking gas and there is no way to separate out the natural gas heating costs from the cooking gas costs because they would be on the same bill, which means I would have to assume them for the year. This does not make sense.
Based on your advice, I may just insulate the walls of the two rental units, but hold off on the conversion as the oil boiler that we have is still rather new and efficient.
In the current rental market, this idea is a non-starter.
Predicting the future is never easy, but planning on a rental climate a la 2005, where all leverage tilts towards landlord is a risky bet.
The job you propose is actually three concurrent projects.
1. Oil to Gas conversion (entails asbestos cert, tank removal cert, plumbing permit/inspection, removal old and install new.
2. Replumb building to zones, replumb all radiators, new manifold/circulators, thermostats and wiring
3. Install separate boilers, replumb all DHW, plumbing permits/inspection for meter pans, gas piping, controls.
Number 1 may make sense if oil unit is older, inefficient, or shaky.
Number 2 makes sense if walls are open, and should greatly reduce heating expense.
Number 3 makes sense only if condo conversion is imminent, in that the ROI would take forever unless you could cash out and pass up front expense to unit purchasers.
Listen to Master Plvmber.
never going to make financial sense for you to do this.
(installing several furnaces, etc and metering)
I just did what you are talking about in a 4 Family. It hasn’t been plain sailing. Instead of having 1 good boiler that cost $6,000 I have 4 small boilers that cost $1,500 a piece. My boilers, Weil Mclain, make the hot water etc, but with 4 boilers you have 4 times the problems. Also these small boilers are computerized, not something a layperson can figure out easily. The reason I did it is because I was renovating the building, and the apartments are very large.I figured if a family with kids rented the apartments it would reduce conflict if they managed their own heat.For example if they had a newborn and wanted the heat on full blast 24hrs a day they could.In your situation the apartments are one bedrooms so most likely you will be renting to a single or couple who won’t expect the heat on all day.Also if you are running your own heat the additional cost of heating the two lower floors at the same time probably wouldn’t be great.
Listen to Master Plvmber. The expense of hw heater & boiler times 3 + extra piping + extra meters is not going to be worth it. If this was a condo conversion or a gut reno, sure, but you’re gonna end up not doing it once you know the total costs.
I’d think you’d lower the rents by ~$75 per month to compensate for the reduction in service worth about $900/year for each apartment, and hope you’re own bills are $1800 less/year. Guaranteed higher up-front costs and approximately the same net (rent – expense) … how does that make sense?
While the leases are in effect you have zero negotiating power with your tenants. They have no good reason to agree to this, unless they wrangle concessions out of you.
If you want to do it, wait until the lease expires. Also double check your leases’ renewal clauses, you may need to give tenants long notice before the lease is up (it depends on the renewal language but I think in general you have to tell them 30 days before the lease is up).
I am curious how you’re going to save money with this setup. It sounds like a lot of up front money that would take you years to recover. And as others have posted, meanwhile you’ve made your apartments less attractive to renters.
If you want to change the heating system now, do it, but do not change the arrangement with your tenants after 3 months. No matter how fair you try to be, there will be resentment. At the 12 months mark, check usage, make sure it’s in line with expectations. You can always increase the rent of the person, or switch to a tenant-pays-heat lease.
Change the leases when they expire. You can’t do it mid-lease. Also, it’s not as easy a process as you might think if the C of O is not actually for a three family.
I’m sure I get 20 calls every autumn to estimate this type of job. I think I’ve actually performed the conversion around five times in my life. It seems like a great idea until you see the numbers on paper.
A job like this makes most sense when part of a gut rehab.