Does a Deep Energy Retrofit Make Sense For Your Fix-and-Rent MDU?

Two of the most important developments in real estate over the last generation have been the rise of ecologically-friendly and sustainable buildings and the re-imagination of multi-family dwelling units (MDUs). For a long time, MDUs were very utilitarian, in an attempt to cram as many renters into one building as possible. They were rarely great places to live, but over time, smart owners starting adding things like gyms, open rooftops, common areas, and other perks to make them seem more like welcoming homes. Over time, these MDUs started to morph into mixed-use buildings, particularly in dense urban areas.

This made sense. After all, mixed-use MDUs could house dozens or even hundreds of residents, as well as retail, business, and leisure components. San Diego is reinventing itself as a mixed-use, MDU-oriented city. All over California, MDUs are popping up, making this a great time for smart real estate investors to get in on the action. The question is, when should that intersect with the other big trend, eco-friendly buildings? In order to compete, both in terms of tax incentives and good publicity, a developer should be prepared to use part of their budget to engage in a green retrofit.

This green retrofit can be simple or it can be a complex overhaul. The most complex is what is known as a “deep energy retrofit,” which essentially scraps every part of the building that consumes or wastes energy and starts anew. This is expensive and likely not worth the money for fix-and-flippers. But for those interested in the buy-and-hold or fix-and-rent strategy, who want to hang onto a property and let the market catch up, a deep-energy retrofit could be a great use of your hard money loan. Let’s explore what it means and if you need to do it.

Understanding the Deep Energy Retrofit

A building can be made more energy-efficient in many small ways. Plugging leaky walls and doors, replacing windows, installing smart lights, and other small steps can really add up to a big difference. A deep energy retrofit is a lot more intense than this, and it sets out to accomplish something more than just saving money at the margins. It’s about making money for your building: positioning it as a building that may not have a new frame, but boasts a new and modern interior.

Here are a few projects that go into a deep energy retrofit:

  • Replacing physical structures: Windows, roofs, and siding can become huge energy wasters when they reach the end of their respective lives, and that can cost you a lot of money. You replace all of these with a deep energy retrofit. One thing that people do – rarely, but increasingly on apartment buildings – is add siding. Siding used to be terrible for energy and an aesthetic nightmare, but there have been a lot of advances in technology that make it extremely efficient in retaining energy, and not unpleasant to look at. In some areas, it is even considered fashionable.
  • HVAC replacement: Older buildings are saddled with HVAC units that are not efficient. Very few in older buildings are even automated. Replacing them with automated units that use smart temperature controls reduces thermal and electrical loads.
  • Lighting and other electrical upgrades: This can include smart, electric window shading.
  • Water control: Installing smarter gutters, water-capturing resources, and green rooftops can help bring down energy costs and regulate the heat of the building.
  • Changing (or partially changing) over to solar power: The cost of photovoltaic cells have dropped enormously over the last decade, and with tax incentives and the advent of solar batteries, this is increasingly cost-effective.

But Is It Worth It?

There’s no sense kidding ourselves: a deep energy retrofit is an expensive undertaking. A full procedure can cost hundreds of thousands of dollars. If this is worth it depends largely on how you intend to use the building. If you intend to hold onto it and rent it out for a long time, this could very well be a great bet. A few factors to consider are:

  1. Is the building okay without it? No one wants to live or open up shop in an energy-inefficient building, but if you have a decent infrastructure, you can do smaller fixes to make it palatable to renters.
  2. Does the neighborhood value these kind of renovations? Don’t discount word-of-mouth and good publicity. Any trendy restaurant would love to lease space in the greenest building in the hub.
  3. Did you purchase the building in a distressed, but up-and-coming area? If so, the money you saved may make such an effort worth it.
  4. Are there local tax incentives for doing so? California offers rebates for whole-house renovations that save energy by 15%. Municipal tax incentives can make it even more tempting.

Don’t forget, you’ll be saving money over the life of the building, which also makes it attractive to buyers. It positions the building to be viable for the next 50-100 years, by some estimates. If you are planning on holding on to your building to rent it, or even if you are planning to just hold on long enough to wait for the market to peak before selling, positioning your building as the greenest and most efficient one in the area is great for resale.

With a hard money loan from Socotra Capital, California’s leading equity-based lender, you can make a deep energy retrofit work with your rehab budget. Socotra knows that real estate investors need to take advantage of opportunities as they arise, or else you risk losing out on your next great property. That’s why Socotra moves quickly to provide you with speedy approvals based on the equity of your project, not on your credit history.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.

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