Most property owners are accustomed to looking at repairs and renovations on a dollar-in/dollar out basis. This is particularly true for energy efficiency-boosting projects like putting in more efficient air conditioners, improving insulation, and the like. Most landlords balance the cost of making the change against the expected savings in utility bills, with some depreciation tax considerations on major appliances such as boilers and on the insulation itself, and make the decision on a strict ROI/IRR basis alone.
This is usually a good discipline. But if it’s the only criteria you use, you may be missing out on an important part of the cost/benefit equation: Environmentally-friendly buildings may command higher rent payments.
Environmentally-Friendly Housing Rents for 24 Percent More
Data shows that having a LEED certification – a common designation issued by the U.S. Green Building Council that is reserved for the properties that have the best energy efficiency and the lowest negative environmental impact – is the second highest driver of rental market value. All things being equal, LEED certified properties command an average rental premium of about 24 percent! Only proximity to a central business location is a higher driver of rental market value.
While it’s not easy to get an existing structure LEED certified unless it was built with LEED certification in mind, a 24 percent increase in long-term rental market value is a powerful incentive to consider making any future extensive renovations or new construction with LEED in mind.
Property owners of LEED certified buildings can maximize the impact of this certification by issuing press releases to local publications and updating their brochures and other sales or leasing literature. (The LEED people, being shameless promoters themselves, will happily walk property owners through this promotional process – and even sell them plaques and certificates to help in that regard.)
The Environmentally-Friendly Projects With the Best ROI
GreenAndSave.com has compiled a list of repairs and improvements – many of them quite easy and simple – that generate substantial ROI just on a cash-in/cash-out basis. Here are the top five green renovations on an ROI basis:
- Programmable thermostats
- Added cost: $115
- Annual savings: $180
- ROI: 156.5%
- Standby power reduction
- Added cost: $20
- Annual savings: $24
- ROI: 120%
- Compact fluorescent lighting
- Added cost: $60
- Annual savings $80
- ROI: 133%
- Hot water heater blankets
- Added cost: $25
- Annual savings: $30
- ROI: 120%
- Heating system tune-up
- Added cost: $200
- Annual savings: $180
- ROI: 90%
- Seal duct leaks
- Added cost: $450
- Annual Savings: $300
- ROI: 67%
GreenAndSave.com estimates an ROI of at least 30 percent on all of these projects, and none of them have an additional cost per project of over $3,000, according to their figures.
Some Thoughts on the ROI of Solar Power
Solar power is not truly cost-effective in some instances. Traditionally, solar has been sold on the basis of the value of tax incentives. But projects that rely on a tax subsidy in order to be cost-effective are, by definition, generally not cost-effective. Even GreenAndSave.com, a site that is friendly to environmental and green energy causes, assigns an ROI of about 9.2 percent to solar electric systems.
Some locales are better for getting a good ROI on installing solar panels than others, though, and as improvements in photovoltaic cells continue the ROI on solar will gradually change. But on an all-in cost per kilowatt hour, including inevitable maintenance and wear and tear, solar doesn’t make financial sense in many settings. In areas where it does work well, there are still a lot of renovations and improvements you can make that have a better likely return on investment.
Become More Green With the Help of a Property Manager
Are you hoping to make your rental housing more environmentally friendly but unable or unsure how to manage the necessary renovations? Among the many other services they offer, professional property managers are adept at managing renovation projects (not to mention general maintenance and repair projects).
If you’re interested in maximizing your rental income, it behooves you to get free quotes from a property manager or two and start a conversation that could have a dramatic and lasting impact on your finances.