Separate heat or central heat in triplex? Am I making things too complex?

[kchaplin43]

So, I recently purchased a vacant triplex in need of major renovations in Western Washington State. The house was built in 1928 and was a two story with full basement before being converted into three units with separately metered electricity. It now has a one bed one bath apartment in basement, two bed one bath in central apartment and one bed one bath in second story. The previous landlord installed baseboard heat in basement and second story and left the main floor heated by the 1970s era natural gas furnace. The original ductwork to heat the entire house is still present, but was covered up in the top and bottom unit.
I have had my HVAC guy look at the ancient furnace, and it's rusted out and the blower doesn't run. So I need to replace. In talking with him I asked about installing a new furnace and optimizing the zoning to run a separate zone for each unit, which he bid at $8500. But only one gas meter, so I would have to pay for heat in all three units. Another HVAC installer I know suggested three separate 80% furnaces, a little extra ductwork for about the same cost $9000. Just installing a new 95% furnace for the main unit is around $4000, plus a couple of the baseboards are pretty beat up so I would replace them as well.
I'm relatively new to real estate investment, and am scrambling to get the place updated and rented out but this issue has so many options I'm kinda stumped.
I would opt for just updating furnace and leaving separate baseboard units, however a landlord friend recently told me he pays for central heat in a fourplex, but raised rent to each unit to cover the heat and has been making money from the situation; and has happier renters who don't have to worry about an additional bill... So this leaves me with a few options.

Option 1: Update furnace and leave baseboard heat in upper and lower unit, leaving central unit to pay for gas. Cost approximately $4500 (furnace and five $100 baseboard units)
Option 2: Update furnace and add zoning, but one gas meter and I pay for heat. Cost, $8500 plus monthly gas bill. (But potentially raise rent to cover bill, however no incentive for renters to conserve heat)
Option 3: Update triplex with three new 80% efficient furnaces, and duct work. Cost, $9000 plus potentially much more for two additional gas meters from street.
Potential Option 4: My parents just updated their 10 year old furnace from propane to electric heat pump. The furnace comes with a natural gas conversion kit, and is free, however my HVAC guy says it is too large and will "short cycle" in the triplex because it has too large a blower. I have another guy looking into the issue, as I'm suspecting he just doesn't want to rework the old furnace to make it work....

As you can see, I have quite a few options. Any insight would be helpful.
Thanks!

[escolegrove]

I DO NOT recommend you including heat in your rental price!!!!!!!!

I own 4 rentals another 4 for family. Their are rental "ceilings" that tenants will pay. In my experience an all inclusive never covers the complete costs. You make so much more JUST charging for rent and passing everything on to the tenant. In my experience and areas. We aim at professionals. Think of airline tickets. Now that the airlines have to include the "entire" price in the ticket the whole cost is a lot more noticeable than when it just use to be the "ticket". Rent is the same way. You will have a lot of people who won't look beyond X even if it is included.

I have a hybrid efficient house in California. While the bill is usually $150 less for electricity than normal houses that didn't get me $150 more in rent. I have found by not including any electricity, landscaping or other extra's I get more cash flow. I have found that the tenant adds no "value" for these extras.

You cannot charge the central unit for EVERYONES heat. So you need to figure out how to divide the cost out. Definitely check you rules. Sometimes the landlord will get the bill and than charge everyone their percent based on the square footage. Personally that is too much work. My tenants direct deposit their money into my account. The last thing I want is to have to go after them for another bill. Are you planning on holding this place for a while? If so I would figure out how to get every unit separated so they work with the utility company and pay their money monthly.

[AlmostIndependent]

I have several rental properties. The last two that I purchased have central heating. I found that by charging the tenants a portion of the gas bill I have cut usage by half (HALF!)  My first two rental properties both had individually metered gas; I don't have to worry about it unless the tenants stop paying.

I say that if the numbers work out go with the individually metered option (I have no idea what it costs to install a new meter, but I have a sneaking suspicion that will be far from cheap.) It will be less work for you than charging tenants for their heating use, tenants may prefer not having to pay an extra bill but I seriously doubt anyone that really wants to rent your place will change their mind because of that.

If that is cost prohibitive (and I suspect it is) then I would suggest you look into other options to have tenants pay for their own heating (Toyo stoves with individual diesel tanks are popular here in Alaska.)

If that isn't feasible (cost, building codes, etc.) then I would suggest billing the tenants a portion of the gas bill based on the size of the apartment (ie. if the apartments are equally sized and the gas bill is $75 then each tenant pays $25.) It is a little more work but it will save you the cost of the gas bill and the frustration of going to your rental in January and seeing tenants with windows open and the thermostat set to 80. If people have a stake in the cost of heating they will be more proactive about dealing with and/or ratting out others who are being wasteful.

[kchaplin43]

Thank you for the insight, I am going to keep the heat separate. Thinking back to my college days there was one apartment that I lived in that was all inclusive and I was guilty of keeping the heat up with window open a few occasions...

I'm hoping this re-used furnace will work and save me a bundle, but regardless, keeping everything separate seems like the only way to go.

AlmostIndependent, I lived in Petersburg for a few years, and fish there every summer (except this one due to triplex project and low projected fish run) it's always great to hear from an Alaskan. Those Toyo stoves are very popular, along with electric infrared.

[AlmostIndependent]

I lived in Petersburg for a few years, and fish there every summer (except this one due to triplex project and low projected fish run) it's always great to hear from an Alaskan.

Nice! I work on the ferries so I make it to Petersburg fairly regularly.

Another quick thing, I have a clause in my lease (that is mostly a holdover from the days of me paying the gas bill and including heat in the rent) that states that tenants who have windows open October-March will be charged $100 for a first time offense and $200 for subsequent offenses. You can use whatever months you feel are appropriate for your location but that gives you some teeth (and extra income) for dealing with tenants who are wasteful.

Charging separately for heat is a little extra work for sure but it is a HUGE money saver. I went from paying $600/mo for gas on my 6-plex to paying $300/mo and having the tenants split that amount. It is a bit of a hassle, but for $600/mo savings to me, I think it is totally worth it.

[escolegrove]

I love the add fees idea. All my violations have financial consequences. I have found it makes life so much easier.

[AlmostIndependent]

I love the add fees idea. All my violations have financial consequences. I have found it makes life so much easier.

It makes life easy and it adds to the bottom line at the same time. Any time you can make your tenant responsible for something they will either act responsibly or, if you have a financial consequence, pay you for their laziness/carelessness. It's a win win.

[malacca]

For lower end tenants the all inclusive is a big selling point as they can't manage their money well and want one single payment.

For professionals keep everything separate.

Keep in mind having separate furnaces means more costs to upkeep.

But I find tenants leave windows open in the middle of winter if they aren't paying the bills.

It is a coin toss.

[jmoney]

I would try to put in three furnaces if you keep the building for an extended time. Even though the upfront cost is more its a better way to do things and will save hassle down the road. My goal is to keep everything for the rest of my life (50 years?) so upfront costs aren't that big of an issue. Long term reliable cashflow is to me but it depends on your goals.

The going rate is 2000-2200 for a furnace in Ohio. Also the local utility company will add the gas meter for free but you have to run the gas line from the inside of your building to the furnace.

One other benefit I like about separate meters is if the tenant doesn't pay you don't get stuck with it. This may vary where you live so check. There is a small risk to you that if you separate bill your tenants and they don't pay you then you have to pay their bill. Some tenants do stupid things (like open all the windows during a 20 degree day to let in some fresh air) and when their back bill is 650 and they have to go its nice to have the utility company cover that.