Saturday, July 23, 2011

Increasing Income in Rental Properties (Part 1 of 3)

If you own a rental property of any kind, you are looking for ways to increase your income, right?  Are you always looking at the right options in doing so?  How about re-focusing your attention on your expenses, things that you can change rather than complaining about government interference, can't increase rents enough, etc.  We need to focus on what we can readily change, and not waste energy on things that we can't.

Expenses are to a rental property, the antithesis of what we want, yet sometimes as investors and landlords, we forget that if we reduce our expenses, we are doing the same as increasing revenues to our bottom line.

What Can We Do?

Whether you manage the property yourself or have a property manager looking after your asset, you should carefully review your monthly expenses and look for things that are out of the ordinary compared to previous months.  If it's a property you just purchased, owned for any period of time or are about to purchase, it's important that you understand the age of your heating equipment, the condition of your window and door seals, and the level of insulation (R-Value) in your ceiling, among other things.  

Poor door seals, old windows and old heating equipment in particular can be a high drain on your expenses.  Older furnaces (more than 10-12 years old) are likely not as efficient as newer models, and deteriorate over time regardless of how efficient they were when they were new.  Remember that just like your car, your furnace becomes less efficient as it gets older regardless of regular maintenence, causing more of your money to burn up "the stack".  The same holds true with older windows that are single pane glass and/or poor seals.  Older homes and buildings may not have adequate ceiling insulation which can be corrected relatively inexpensively.

Understanding these issues before you acquire a property is important but if you already own a property and know that you have possible issues, you should consider addressing them, by first, finding out the specifics of what you need or could get done.  The first step is to see if there are any government grants / rebates available for the upgrades that you may need.  Just do a web search first and then call your local government office and ask if there are any rental property grants or rebates available to owners.  If they tell you "no", then ask this question: "Well, if you were offering grants or rebates, who would I speak to in your office?"  Once you move onto the next person, you may get a no answer again, so ask exactly the same question again.  Keep doing so until you find the person you need to talk to.  Start with your local municipal government, then move up to the state or provincial government and then finally the federal government.  The little bit of time you invest may make the difference for you to not only reduce costs but get free money from the government that is there for the taking.




A short aside.....If you're a US property owner, there are also local grants available if you have lead paint (houses built before approx. 1978) that needs to be dealt with.  These are called "Lead Abatement Grants".  Check with your local government to see if they have grants and/or rebates available for this type of work.  Sometimes, you have to dig a little just by asking the same questions posed above regarding rebates and grants, until you find the right person to talk to.  It can be expensive to take care of this problem, and if you can get some government money to help, then go ahead and apply to get it if it makes sense for your situation.  I'm not aware of such grants in Canada and if anyone does know of any, please feel free to reply to this post with your input.

The next step, depending on what the government program is to follow their requirements.  This sometimes involves an energy audit, and sometimes, it involves a combination of that and a government site visit.  Regardless, you will need to follow the rules to get your rebates and grants.  Once you know what you are eligible for, then it's a simple matter of economics to see if it's worth it for you.

Then you simply do the following arithmetic:

Upgrade cost before grants - grant $ = Actual cost of improvements

You should have some idea what your savings should be by asking the contractors who gave you quotes for the work that they want to do.  Have them give you approximate savings in writing before you give them the go ahead to work.  If they are good, they will give you these numbers because they can do simple heat transfer calculations.  If they don't know what they're doing, they will tell you that they don't offer calculations.  You may want to think twice about dealing with such individuals.

Then it's a matter of a simple break-even analysis to determine how long before you get your money back and after that, it's pure money in your pocket.


Upgrade to 95% efficient natural gas furnace, replacing 15 year old (80% mid efficiency furnace).  Note that your "old" furnace was 80% efficient when new, and now, it's likely in the 60-70% efficiency range or even less.  So, let's call it 60% efficient as an estimate.

Your 95% efficient new furnace will burn approximately 1/3 less gas, so you would expect your heating bill to be reduced by about 1/3.  Just use the following simple formula:

60 (current furnace eff approx.) - 95 (new furnace eff) = - 0.368 

= -36.8% (reduction in heating cost)

Using the above example, take your current heating bill and multiply your annual heating bill by 36.8% and you'll get your approximate annual savings by going with a new furnace.

Now take your new furnace cost divided by your annual savings from the above calculation and you'll get the approximate number of years it will take to get your investment back.  Is it less than 5 years?  More?  Depending on the time it takes to recover your cost, this is a decision that you will need to decide on whether a particular change like this is worth it.  Factors such as how long you want to keep the property and your current free reserves to pay for these upgrades come into play.  Everyone's situation will be different.

You can do the same type of calculation for each item that could be changed to improve your property's energy efficiency.

It may seem like a pain, tedious, not worth it, but you will be surprised at how much money you could save by making a few simple changes.  Spend a little bit of time to take care of your property's costs because it will save you money in the long run, which will make your property more energy efficient, more environmentally green friendly, and put money in your pocket that you thought you wouldn't get.

Remember!  It's your money, and your property, and there is nobody else out there who will care more about it than YOU.

The above article concentrates on rental properties, but these methods are completely applicable for homeowners wishing to cut their expenses and leave more hard earned money in their pockets.

Have a great day!  

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