September 15, 2020
When reviewing financial statements for potential acquisitions, I am frequently amazed by the incredibly high utility costs. Owners often seem content to let these slide — perhaps assuming they are typical of that property type and location or simply unwilling to spend the time and expense to find a long-term solution.
Notwithstanding, all competent operators recognize the importance of implementing a water conservation plan, including efficient toilets, showerheads, and faucet aerators. But if water bills remain high after those changes are made, other steps need to be taken to determine the full cause.
In this asset management case study, I will explore how we addressed abnormally high water bills at our 172 unit property, Del Sol on Royal Lane, in Dallas — ultimately cutting our cost in half. Del Sol is an all-bills-paid property, so water conservation is essential as all savings go directly to the bottom line. By the way, Del Sol was one of the first deals for which we used our real estate syndication software.
The three main factors we addressed are:
Before delving into each of the individual factors, we should discuss how we determine that a property’s water usage is abnormally high, to begin with. Comparing water bills to those from similar properties is a useful method.
However, even if the properties have similar fixtures and pay the same rate for water, there may be significant differences in usage due to the unit mix. For example, a 100 unit property comprised of all 1-bedroom units will logically use less water than 100 2-bedroom units.
Additionally, certain tenant demographics may tend to live with more people in a given floorplan (over-occupancy, discussed in greater depth below). Water usage per unit is most directly correlated with the number of people in each unit. According to the USGS, each person uses about 80-100 gallons of water per day for indoor home uses (see link). On average, that is broken down as follows:
By multiplying the average daily usage per person by the average number of occupants per unit, we can produce a benchmark number to compare our property’s usage. So, for example, if we figure our property has 2.5 people per unit, multiply that by 80 gallons x 30 days, and we get 6,000 gallons per unit per month. If usage is significantly higher than that, there is a good chance we have room for improvement.
The most straightforward factor to address is fixtures. Various water conservation companies will quickly go through every unit and swap out all toilets, showerheads, and aerators. When we did our due diligence on the Del Sol, we found that all toilets had already been replaced with efficient models. We went ahead and replaced all showerheads and aerators, but that failed to make much of a dent in usage.
Leaks are often a major issue at older properties that have not undergone any plumbing replacement over the years. Del Sol fits into that high-risk category, having been built in 1966. During due diligence, we discovered some evidence of leaks. However, the full scope of the issue did not become evident until we began the foundation work and started opening up floors and walls.
The extent of the leaks turned out to be much greater than anticipated, and the ensuing plumbing repairs have been our largest unanticipated expense to date. During the first few months of ownership, we focused relentlessly on finding and fixing all leaks by hiring leak detection contractors who use specialized equipment to locate leaks that are otherwise hidden by walls and floors.
Although we spent more money upfront to fix the leaks, the expense will ultimately pay off many times via a huge water usage decrease.
Over occupancy is perhaps the most overlooked factor contributing to high water usage. This refers to more people living in a unit than are permitted by the lease. During due diligence, we discovered this issue when we found that many tenants were converting living areas to bedrooms and/or had multiple mattresses in a single room.
This situation arose because the previous owner failed to enforce the occupancy restrictions in the leases. By enforcing the occupancy rules, we can often substantially decrease water costs while maintaining or increasing income. Unfortunately, this may necessitate evicting the tenants if they refuse to comply or cannot afford the rent once they get rid of the extra residents.
In addition to reducing water costs, it allows us to place a higher quality tenant in the unit who has enough income to qualify without taking on additional roommates.
We have also implemented a real-time water usage monitoring system called WaterSignal (https://www.watersignal.com/) to catch any leaks or excess usage before it becomes a major problem. WaterSignal installs monitoring devices on each water meter and allows us to track usage in real-time via their online portal. We can also set alerts, so we have notified immediately if usage spikes on any meter. This has been a handy tool in our ongoing effort to optimize our utility expenses.
As you can see in the graph below, by focusing on these three factors and implementing a monitoring system, we were able to substantially decrease the water cost at Del Sol over the course of our first 6 months of ownership. Knowing how to manage and optimize such costs adds credibility and helps you build your track record as a syndicator. As a result, making investor relationships and raising equity easier. We hope you found this asset management case study helpful and will be happy to hear from you if you have any questions.