Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
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I went back to the data mine this week to see how our current heating and electric bills compare to those from the same period in the prior year.

In 2007, we had a number of circumstances that affect our heating and electric bills change, some for the positive and some for the negative:

  • ScrapperMom was on maternity leave for 3 months at the beginning of the year. This resulted in a higher demand for heat and electricity, especially since there were now more loads of laundry each week.
  • After her maternity leave ended, she took a new job that allows her to work from home. This extended the added demand for heating and cooling.
  • We replaced our older boiler with a state of the art Micro-Combined Heat and Power system. This reduced both our heating and electrical costs.
  • We set up an office for ScrapperMom in the basement. The basement was previously heated with electric heat, so to take advantage of the new Micro-CHP system we converted the basement over to hydronic baseboard heating.
  • We decided to try an experiment:cross-tie our heating system with that of our rental unit to see if we could offer heat and hot water at a higher efficiency than the rental heating system, but still keep costs even or come out ahead.

When our rental apartment became available last fall, we listed it on Craigslist for $1250 per month. The previous tenant had paid $1200 per month for the prior 2 years. This monthly fee did not include heat and hot water. After a few weeks of nothing but nibbles at the $1250 price, our new boiler was installed. We set up the cross-tie with the other boiler and then listed the apartment for $1300 with heat and hot water included. The previous tenant paid a little under $1100 per year for gas (heat, hot water, stove/oven), so the extra $1200 per year in rent should have been enough to cover the additional costs that we would be incurring to heat the apartment — especially considering that the replacement boiler is more efficient than its predecessor.

What we found was a large increase in responses to our advertisement when we listed the apartment for more money but included heat and hot water. In this case, the difference in rent (presumably) more than covered the additional costs to provide the heat. I certainly didn’t expect it to make nearly the difference that it did. My best guesses as to why so many people were willing to pay a fixed cost for heat and hot water are:

  1. When moving into a new apartment, people generally have no way to tell how expensive heating is going to be. It could be a super-insulated unit with very low costs, or more likely an older, drafty apartment that costs a small fortune to heat.
  2. People recognize to a certain degree that they are bad at budgeting for costs that can vary dramatically from month to month over the course of the year and can handle it much better if they simply paid a fixed monthly rate all year round. I suspect it is this very concept that has prompted our local gas utility to offer what it calls “Balanced Billing” which estimates your annual bill and then breaks it down into even monthly payments so that you might still pay $125 per month in the summer, but you avoid a $350 bill in January.

Before simply cross-tying the heating systems, I thought of a couple of different ways to account for using one boiler to provide heat for the whole house. Obviously solution number one is to figure out what it cost to heat the apartment with the old boiler and then charge a flat rate based on that. The obvious downside to flat billing is that there is no “nudge” to conserve by relating consumption to payment, but since the apartment in question has a relatively low heat loss, even cranking up the heat will result in little additional fuel usage.

Another solution would have been to purchase BTU meters for each heating zone. Since there are 4 heating zones in the house, a BTU meter on each would indicate what percentage of the bill for heating was used by each zone. Once this information is known, actual bills for each apartment can be calculated. Tying the actual consumption to actual price would help on the conservation side, but the cost is over $500 per BTU meter.

Now that I have a full heating season worth of data, let’s look at the results. For the last year, our cost of heating for the rental unit has increased by about $600 (as compared to a tenant paying the bill). The cost for heating our apartment and the basement has risen by about $300. The electric cost for both our unit and the public areas of the house has risen slightly, which brings the overall utility increase for the house to $1070 for the year. Clearly this indicates that not only does the $1200 per year in extra rent cover the cost of heat and hot water, but it also covers (indirectly) the increased cost in our utilities as well.

The bottom line in all of this is that offering heat and hot water in a rental unit increases the amount of interest which decreases the amount of time it sits unrented. Also, the market will bear more than the actual cost of the utilities for the peace of mind of not having to guess what they will cost and not having to budget for big bills in the winter and smaller ones in the summer. Lastly, by tying the apartment heating into the new boiler setup, the cost to heat the apartment was reduced drastically.

What do you think?

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2 Responses to “Heat and Hot Water Included”


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