Download the free deal analysis calculator which will help you accurately screen good from bad deals saving you a ton of time.
This is a guest post by Bob Wells, a retired HVAC tech who now dedicates himself to sharing knowledge on his website hvactraining101.com. Bob worked over 30 years in the field, 23 of which he ran his own contracting business. He’s dedicated to keeping up with the latest developments in the field and helping others to learn the trade better and advance their own careers.
Bob is on Twitter with the handle @hvactraining101 and you can also find him on Facebook.
As you know, HVAC can be a major expense for your rental property. In fact, when analyzing your rental property deal, if you miss a major item like this, it can completely blow up your numbers.
According to Energy Star, the average American household spends over $2,200 annually on energy bills. Over half of these costs can be attributed to heating and cooling a home. When looking to invest in a rental property, it is easy to get caught up in unit size or closet space while overlooking the HVAC system. Those might be key selling points, but the effects of a faulty or inefficient HVAC system have more serious repercussions.
As a real estate investor, it’s important to learn how to be on the lookout for common system issues that would require major repairs and replacements. Educate yourself about HVAC to ensure your new investment is energy efficient, keeping monthly bills low and your property temperature-controlled and comfortable.
When evaluating prospective properties as a real estate investor, get to know the HVAC systems right from the start. Knowledge is power, learn what will need repairing and what will need replacing. Evaluate the costs of repairs and replacements and learn about the energy savings you might reap from installing newer equipment.Remember too that the benefit to you might be indirect, especially if the tenants are paying their utilities. Let’s look at some areas to pay attention to.
Unfortunately, HVAC equipment doesn’t last forever. The average lifespan of an HVAC is 15-20 years with proper maintenance. Even if older equipment is still trucking along, it may end up costing you a small fortune in energy bills. Outdated units are not as energy efficient and investing in new technology could be a good long-term investment for your rental property.
Ask to see records of annual inspections and repairs. Ask questions about the building’s systems and the age of each unit. If the building has an ancient, leaky furnace or other obvious major issues, the sellers most likely will figure it out.
The sellers often repair or replace HVAC systems during negoations. Don’t be afraid to ask.
Also, an old system may have a few more years left, but do the math on your energy costs! You could save more than 30% on A/C annually if you replace it with a more cost-effective, upgraded unit. An old HVAC system isn’t a deal breaker, but know your replacement and repair costs before purchasing and try to negotiate using this knowledge.
If you’re thinking “the tenants pay the bill; I don’t have to worry about it” – think it over. Your renters could quickly become frustrated with high energy costs and look to move on to greener pastures.
Are some rooms too hot and others too cold while only maybe a few rooms are “just right?” This can indicate a major issue with the HVAC delivery system. A common problem that causes the Goldilocks Effect is insufficient insulation or faulty duct sealing. Your system will have to kick it into overdrive to keep these rooms warm or cool.
If the house has recently had an addition put on or the floor plan opened up, be sure to check for inadequate temperature control. The HVAC system may have just been poorly planned to begin with and might need to be redesigned entirely. If the building was subdivided into apartments and the heating and cooling weren’t taken into account, you’re also going to have issues. HVAC isn’t done on a simple square footage basis – it depends on a lot more than that.
Something as benign as a thermostat being located too close to a window that gets more sun exposure than other parts of the house can be affecting the thermostat and the overall heating and cooling of the house. Just like in real estate, what matters for a thermostat is location, location, location.
Sometimes you don’t need to be a professional to notice HVAC problems during a walk-through. Trust what you see and what you hear, maybe even what you smell. Small signs can signal larger problems. Check the filters to make sure they are the right size. Check for odd smells coming through the vents and check for dirt and grime. Dirty ducts indicate poor maintenance.
Also, dust can cause damage to the system.
If you hear rattling, there may just be a loose screw on a vent grate, but it could be a problem with the unit resonating through the vents themselves. The Goldilocks factor described above can be detected while touring a property as well. It could mean that the system was not sized correctly for the size and layout of the building.
A filter or a loose screw is something you can fix yourself in minutes. But if it’s beyond that, be sure to investigate further with the help of an HVAC professional. Use your senses to investigate. These small signs can help you pinpoint a much larger, more expensive problem that even the sellers might not be aware of.
High energy bills can crush your return on investment. Inefficient HVAC systems will frustrate your residents with high utility bills and lead to high turnover. Utilities are often the number one expense for a general household and leave renters feeling defeated. Plus, inefficient equipment not only drains your wallet, it’s also bad for the environment.
These are just a few reasons why it is important to make sure your system meets general efficiency guidelines set by the Department of Energy. Of course, any reputable contractor is going to make sure you do this, anyway. Learn about SEER/AFUE ratings and make sure your equipment meets these standards before purchasing:
SEER (Seasonal Energy Efficiency Ratio), is a metric used to measure the efficiency of A/Cs and heat pumps. The higher the SEER number, the more efficient the unit and the more energy savings you rack up. An example of a bad SEER rating would be 8.0, while an optimum rating would be around 14.0. All Systems Mechanical offers a great evaluation of SEER on their site to help you understand what to look for and not go overboard.
AFUE (Average Fuel Utilization Efficiency) measures the efficiency of your gas and oil-fired furnaces. How much fuel is being used to heat the property? How much is being wasted? As with SEER, the higher the rating the better. If your rating is at 75%, that means your furnace is only converting 3/4ths of the fuel input into actual heat. The furnaces with top efficiency have up to 96.7% AFUE ratings. This would be ideal for utility bill! You can learn more from Cabrillo, a San Francisco-area HVAC company.
How can you tell if the equipment is energy efficient before purchasing property? All equipment should have a little yellow energy label located on the exterior. The label lists the energy efficiency of the unit and its operating costs. Use this information to evaluate the SEER/AFUE ratings. Here is a handy calculator that will help you figure out equipment ratings and evaluate annual energy savings.
So far, we’ve looked at areas you may be able to check yourself. Normally, you’ll want to go more in-depth to make sure there are no hidden traps, though.
When purchasing a new property, it is important to remember that most home inspectors are NOT qualified HVAC technicians. HVAC systems are the highest monthly expense for property owners and repairs and/or replacements are quite pricey. General inspectors may not see the hidden issues with your HVAC systems and this may end up costing you in the long run.
Hiring an HVAC inspector takes a little more time and money, but it will help give you a comprehensive overlook of your systems and units. Sellers aren’t always aware of problems, and occasionally some just are afraid, to be honest about their system’s history. Buying property is a permanent decision, so make sure you know what you are getting yourself into by hiring a reputable HVAC inspector to conduct a separate inspection.
Here are some upgrading options and ideas you might want to consider. If you have to replace older equipment you might as well install the most efficient systems available. Check out these upgrades that might just pay for themselves:
Retrofitting your A/C can be a great choice if you want to lower energy costs fast. If the A/C is in decent condition but is not efficient, consider replacing the compressor or adding condenser fan controls.
Another quick way to save is to add air-side economizers which help your system use less energy by using cool outside air. You can save up to 35% with simple retrofits.
If the property you are purchasing has dead window units or no A/C at all, consider a ductless air condition installation. These systems can provide cooling for a 2000 square foot home or unit. And really, that’s a gross oversimplification. Never really solely, or even primarily, on square footage. The use, facing, ventilation, insulation and many other factors come into play as well.
The average price for equipment and installation can be anywhere between $1800-7000, depending on whether you need a single, double, triple, or quad. Ductless systems have above- average SEER ratings of 16.0 or higher.
Installing a heat pump can make a huge dent in your electricity bill. The pump can replace both the furnace and A/C. If you come across a property with an A/C and furnace that needs replacing, this is the perfect fix. The average heat pump installation can range from $4,000-6,000 depending on your square footage and heat pump type. A heat pump can save you money on replacing and repairing more
Know what tax credits you may be eligible for with the purchase of energy-efficient units.
Tax credits for Energy Star solar energy systems are available at 30% through the end of 2019. The credit decreases in increments of 4% for every year after that and then expires completely in 2021. All solar energy systems purchased in 2016 have already expired.
For purchases made across all HVAC categories between 2011-2016 taxpayers can receive a credit of up to $500. You are cannot make this claim twice for the same equipment, if you have already filed an amount of up to $500 in any previous year you are ineligible.
Unfortunately, most tax credits require the building to be your primary residence (but not all).
The next step is to develop a maintenance plan. This will help ensure your existing/new systems stay in good shape.
First, make a checklist and record the dates of your maintenance. You will be a better seller in the future if you have good records.
Next, keep filters, vents, and units clean. Align and lubricate belts and bearings.
Third, know what maintenance you will do yourself and what you will hire out.
Finally, plan in advance for maintenance and save for future replacements. Find trustworthy contractors in your area before there is a problem so you don’t waste time when there is one. Don’t forget to keep track of your HVAC appointments for regular service, repairs, or replacements.
Leave the surprises for birthday parties and get to know your HVAC system before you make a major real estate investment. Pinching pennies during the inspection process can be the most expensive mistake a buyer can make. Purchase with confidence and don’t be afraid to hire an HVAC specialist to give your system a total checkup.
Make a maintenance plan to extend the lifespan of existing and new equipment. Don’t hesitate to replace old units, it can provide you with long-term energy savings and can even help new equipment pay for itself!
This article was written by one of IdealREIs excellent guest contributors.
I started out as a full-time student, over $60,000 in debt, and didn't even have a full-time job (two part-time jobs).
Learn the system I used to create a 6-figure passive income.
Please log in again. The login page will open in a new window. After logging in you can close it and return to this page.