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Monday, March 17, 2014

Renters, Utilities, and Moral Hazard

Renters, Utilities, and Moral Hazard
We live in an old house. It was built in 1950, back when cement block was the material of choice here in the Phoenix valley. The little details, like the low pitch roof and the long, skinny windows that wrap around the corner of each bedroom, made us fall in love with the place. We put in our offer the first day we saw it...and then waited over nine months, through a short sale and a foreclosure, to finally close on the house. Those cute little details, unfortunately, are also what keep our energy usage so high.

See, thanks to the low pitch of our roof, we do not have an attic. Depending on where you are in the house, there is only between eight and, maybe eighteen inches of clearance between the ceiling and the roof. There isn't a lot of room for insulation. And as there's no access to this space, there's no way for us to even tell if there is insulation up there (let alone install any) unless we cut through the ceiling, or through the soffits. (I'm hesitant to try the latter, as the old wood soffits are one of those little details I like so much.)

And those windows we fell in love with? They're single pane with an old painted steel frame and the crank set from my childhood, that you twist around and around to open and close. They look great and are legitimately nostalgic for me; but our windows are about as inefficient as you can imagine. In the summer, the light and heat from outside just pours into the room. It's the same issue with the cement blocks that build the outside walls of our home. They look cool, but they are hollow inside and, in the summer, you can feel the heat radiating through them as you walk by.

And like bizarro Rob Stark, I know that summer is coming. The days are pleasant now, and we can sleep with the windows open while the cool breeze blows over us. But make no mistake: summer is on its way, and none of us will escape its terrible wrath. This weekend we turned on the AC in our car for the first time, as my wife and I shared a knowing glance. It is starting. Soon, we will have to start using the AC in our house during the hottest part of the day. A few weeks later, we will hit triple digits every day. A few weeks after that, it will only get to a low in the mid-eighties at night. And the AC it will run all day, every day, until fall, pumping cool air into our old house as it pumps money out of our wallets.

So why don't we improve the energy efficiency of our home? We don't, because our renters pay half the utilities. Along with covering half the cost of our internet, television, water, sewer, and gas bills, our renters share the biggest one of the bunch: the electric bill. It runs about $100 a month throughout the year on an even payment plan, to avoid the ridiculously high bills in the summer. But $1,200 a year is nothing to sneeze at. Surely that could buy a few windows, and maybe even some spray-in insulation for the small space above the ceiling. So why don't we do it?

The rub is that we have a moral hazard. A moral hazard occurs when one party has an incentive to take risks or actions that they normally would not, because the costs or consequences would be felt by someone else. We have an incentive not to spend much money upgrading the house, because the costs of the upgrade would be borne by us alone. But the inefficient utility bills, they are split between us and our renters currently. So an upgrade that would normally show a break-even point of, say, two years, would be pushed out to four years in our situation. We probably won't be living in the house in four years.

Since we are planning on converting our home into a rental when we leave the state in a few years, at that point, the utility bills will be paid for entirely by our renters. That's the crux of our moral hazard. We have an incentive to do very little to improve the efficiency of the home now, and an incentive to do nothing for the efficiency of our home once we move out of it. The math says that, with an upgrade with any significant up-front costs, we should just kick the can down the road.

We try to be relatively green in the Done by Forty household though. We recycle. We use our canvas bags at the grocery store. We love Mother Gaia. So the idea of purposely using more electricity to save money isn't, you know, great. Plus, it's not entirely moral to avoid these upgrades just because we can ask future renters to foot the bill. When our great-grandchildren are dealing with the consequences of global warming, and swimming in the streets of downtown Los Angeles, I'm not sure they'll be that understanding when I plead, "But children, new windows did not have a positive ROI!"

I'm honestly a bit torn on the issue. We could afford to spend a few thousand dollars upgrading the house, even if we'd never recoup the costs. Still, I'd rather just invest the money and work towards financial independence, rather than let other people see the benefits of the upgrade. What would you do? Pay the money and save Mother Gaia, or tell that old broad that she's on her own?


*Photo is from mjtmail (tiggy) at Flickr Creative Commons.

56 comments:

  1. We have a similar house with regard to attic space. It's a 40 year old town-house that has the second story essentially built into the shingled "roof" - I liken it to living in a mushroom if that gives you a better picture :) I would love to throw more insulation into it but there just isn't much room.

    Add into the fact that the basement has 1/4" styrofoam glued to concrete (as was the fashion in the 70's) with cheap "wood" panel over top... it really needs to be studed and properly insulated. The problem? I was so in debt that I could fathom the $5k to do it. And now we don't live there. Maybe in three years we will finish the basement up a bit better, but the renters don't mind. They knew what it was going in. It's a great hangout for the teenage boys, but it's not something you show company ;)

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    1. I really like the mushroom imagery, Alicia! I hadn't realized you had renters, but I'm glad to know I'm not alone in our approach to renters and upgrades. Cheers!

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  2. You know I love topics dealing with psychology. I see the moral hazard in paying for the insulation...would it increase the value of the house if you decide to sell? Or could it be a selling point to tenants (thereby increasing the rent you can charge?) Probably not enough to offset the cost I'm thinking.

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    1. Right now we're thinking we'll just keep the house, rather than selling. But I suppose that might be a bit of a naive goal: eventually, we'll likely sell (or buy the farm). I'm sure that energy efficiency probably has some impact on possible rent, but I'm not positive it'll be enough to recoup the costs, as you noted.

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  3. Hmmm... it is a conundrum. Have you considered some lower cost, lower tech solutions that might have a better ROI and also make the home more comfortable in the short term? Things like awnings, exterior blinds and shutters, shade sails, interior storm windows (which are pretty easy to make for under $10 each), a strategically placed shade tree, or even heavier curtains can make a world of difference when it comes to keeping your home cool.

    I constructed an awning for my west-facing deck using some shade cloth, a few 2x4's and a fencing tube. I think the total cost was around $60 and it made an ENORMOUS difference in the comfort of the house and usability of the deck.

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    1. Something on the exterior might be the ticket, EcoCat Lady. The south side of our house gets pounded with sun in the summer. Just something outside to keep the light off of the windows (or, more ambitiously, part of the house) would probably fit the bill and even have a positive ROI. Thanks for the idea!

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    2. Sun sails are cheap and easy... and if you're trying to keep the sun off the house, you can generally attach 2 corners to the eaves or roof - the only trick is finding something to hang the other corner(s) from.

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    3. I'm looking at some now. They may just be what we need as a cheap fix.

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    4. What about also leasing/buying solar panels? It could pay for itself in a few years and add value to the home.

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    5. I haven't found that sort of ROI when I've looked into buying solar panels...I was seeing something along the lines of a 10 to 15+ year break even point.

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  4. I can understand your struggle over whether to make the investment Mr DB40. Like EcoCatLady mentioned above, I think I'd consider some low cost alterations that might improve the situation. I think if your place isn't your forever home, I perhaps wouldn't bother spending the money on it. I wasted a lot of money on my previous homes for efficiency improvements and I really wish that I hadn't!

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    1. This is our first home, too, so I'm really kind of faking it until I make it. I have no idea which improvements will be worthwhile, so we do none!

      I do like the idea of a frugal improvement, if possible. That's a reasonable compromise.

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  5. Totally understand where you are coming from, both as a landlord and a one-time renter in a house share...
    In the house-share, there was no incentive at all to economize when it came to energy use. Even if I did, no one else did, so I still had to pay 1/5th of the $300 energy bill when it came in January. If I had been able to knock $20 or $40 off the bill by turning off the heat in my own room at night, I would have only realized 20% of the savings. So boo to that. These kinds of moral hazards are one of the main reasons why we think it's essential for renters to pay their own utility bills.
    As a landlord, we kicked the can on getting new AC units for as long as the old ones were still repairable since the ~$3500 it cost to replace each unit was a high up front cost. But I had no sympathy when a renter complained about $300 energy bills and I would go into the unit with a repairman when they hadn't been home in hours and the AC was set to 64 degrees! So cold! And they hadn't been home for hours!!! We re-caulked the windows to address their complaints, but (not shockingly) they didn't see much of a decrease in their energy use from that.

    For our own house, we aren't militant about energy savings, but every time we repair something, we tend to choose a more energy efficient method than what we had to start. So, every year we live here, the average kWh we use is actually decreasing with what seems like minimal effort. But we're not too worried about the immediate ROI since we plan on living here for long enough to realize the savings.

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    1. I remember your post on replacing the air conditioners. And I'm really impressed that you guys still had a positive rental income during all that. You definitely bought that property right!

      And we might borrow your idea of just upgrading to a green option when repair/replacement is necessary.

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  6. What about the increase in the resale value of the house? I don't know about those specific projects, but aren't there assessments of what kinds of upgrades generally pay for themselves and which don't? Plus, you may be able to rent the house for higher because your tenants will be spending less on utilities. It's something you can advertise - we've asked about the typical utility bills and factored them into the overall cost at the last few places we've rented.

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    1. I'm hesitant to bank on resale value, mostly because I don't plan on selling anywhere in the near term. As for getting your money back at the sale for upgrades, I generally think you only get a fraction back.

      I'll have to ask around to see if upgrades would yield higher rent. I get the impression that it might show an increase in income, but maybe not a significant one. But it's worth examining further.

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  7. I'm torn on this . . I really don't like the idea of wasting electricity or not making an effort because it won't save money. Even when I lived with roommates and we split all the utilities, I still scrimped on my energy usage. But I am a little crazy when it comes to environmental issues :)

    I like Cat's idea to make minimal changes that would improve your house a little. We have energy saving shades and curtains that make a huge difference on the windows that get direct sunlight, and cost less than $30 per window to boot. :)

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    1. Just some exterior window coverings may be the right solution. I'd love to pick something that looked good, too, but I'll take what I can get. :)

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  8. One other stray thought here. You might want to look to see what sorts of rebates and tax incentives there are for making certain upgrades. Here in Denver if you add insulation you can get a rebate from the energy company and I think it also qualifies for a federal tax credit. Those things might change the equation a bit in terms of ROI. Although I think there are certain restrictions like you have to have a certified contractor do the work, and I'm not sure how much longer until those federal tax credits expire.

    And to check to see if you already have insulation above the ceiling, you can drill a small hole in the ceiling of a closet or some place that it won't be seen - that's what the guys who did my energy audit did with my walls, and they determined that I already had 2 inch insulation bats with a reflective heat barrier in the walls - so I decided it wasn't worth the expense and hassle to try to add more.

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    1. I really like the idea of drilling in over our closets. I'll poke a hole up there this week, just to see. Thanks so much for the idea!

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  9. I have a similar conundrum on whether or not to by solar panels for our house. I haven't done the math recently, but as natural gas recently became cheaper, our utility bills have averaged out to $100/mo. It would take more than two decades to reach the cross over for solar panels. When it gets down to something under 10 years, we'll probably go for it.

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    1. If you'll be in your home for a while, I could see it making sense over a 10 year period. The upfront costs are always tricky, because there are opportunity costs with them. But if the numbers work out, that'd be a win for you guys financially and for the environment.

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  10. We're in a similar situation with our home - part of it was built in the early 1900s when certainly they didn't care much about insulation and anything else than keeping those walls steady :)) In our case, it's really not worth the investment to upgrade everything, so we will try to find something in between, cheaper alternatives that would still make things a bit more bearable. We'll have to fix the roof, but instead of insulating the whole thing, we'll go for binds over the windows, a couple of strategically placed shade sails and we'll be all set. We're lucky though (during the summer, because during the winter we consider ourselves extremely unlucky) to be surrounded by large buildings and it's pretty shady anyway :)

    But to put it short, I'd give the finger to Mother Earth on this occasion and carry on doing what I'm doing already. It's not like I'm throwing oil in the waters :))

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    1. Ha! True, we're not doing anything too bad.

      I just read your post on heating the home in the winter. That sounds like really hard work, C!

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  11. DBF,
    It isn't a moral hazard because you're doing what's in your best interest. My homes are very energy inefficient, but it's not in my best interest to improve it. The only time I made my house energy efficient was with my solar panels thanks to the tax credit. If I didn't have that it would be electrcity all the way.

    Did you end up buying the house? I'm looking forward to that post.

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    1. Hi, Charles. I'm definitely doing what's in my interest, but I think that's the case with most moral hazards. The guys who were shorting their own mortgage backed securities were certainly doing what was best for their interests personally...but it was bad for the company.

      We'll have more news on the house front coming up!

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  12. We've made a lot of energy efficiency improvements to our house (and spent a lot of money that I'm not sure that we'd get back if we sold)
    We're undecided on the whole rent/sell/stay here forever choice yet and at least we have made the house more habitable. The old windows were falling apart and it was practically impossible to get warm in the winter. The roof insulation was free as part of a government energy incentive so that we took advantage of that.
    Part of me loves that we're upgrading a 100+ year old house and increasing it's energy efficiency, but it's not exactly helping us towards financial freedom. Although if we live here forever it will save us money in the future.

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    1. Hey there, Laura. Your home sounds wonderful...we'd love to have a really old home like that someday.

      I think if things are in need of repair, and you're going to be paying some money anyway, then the numbers can be a little easier to justify when doing a more efficient upgrade. The reason our comparison is so stark is that we're comparing an upgrade to doing nothing at all, since nothing's broken.

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  13. We've got the same deal going on in our attic, DB40. We're afraid to go up there simply because we don't know what we'll find. I think we're going to take Cat Lady's advice though and search out some rebates. I'd fur sure insulate the attic if someone else paid for it. :-)

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    1. I hear you about the attic. I'm a bit worried about what I'll see (or not see) when I drill a hole up there. Please post if you find something about a government rebate. That might be the nudge we need.

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  14. No idea how relevant this is but would reduced energy bills help you when you sell the house? At least in Minnesota I think that energy efficiency might be graded for each home on the market. Actually, I doubt it would recoup the cost. I guess like Laurie said, maybe there are rebates for stuff like this?

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    1. Hey, David! Rebates really might be necessary for us to consider shelling out the upfront costs. I'm not sure how common an energy efficiency rating is here, but it really should be. Our weather is about as extreme in the summer here as it is in the winter for you up there.

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  15. Ahhh man this could not have come at a better time. My wife and I were literally having this discussion over the weekend. We have a 1950s house, with old single pane windows and some plexiglass type storm. Since we're moving in about 18 months, it doesn't make much sense for us to spend $5k on replacing them. We wouldn't be able to recoup the cost of the investment in savings over that time period. Additionally, whether or not we choose to rent it out or sell it, we would no longer be responsible for the energy costs. It's really difficult to choose between being a good human and steward of the earth, and letting that money compound over the next 30 years. Definitely let us know what you decide!

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    1. Hi there, Ryan. With a move in just 18 months, it'd be really hard to find a break even point with any upgrade. If you choose to sell, the money might have a better ROI on more cosmetic upgrades.

      I think we're going to stick with what we're doing (nothing), with an outside chance that I'll be able to find some solar shades on bargain.

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  16. Do you get a tax credit for the insulation? If so it could be cheaper than expected. Showcasing an energy efficient house could also allow you to raise the rent. Still, $100 seems pretty low for four people's consumption. My 3 bed place in the UK is very energy efficient, and I pay $50 but there is no AC in summer. $100 is reasonable in comparison.

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    1. Yeah, with $100 total (and our share only being $50) there is only so much wiggle room for improvements. A 10% total reduction in energy costs would net us $5/month, $60 per year.

      There were some tax credits but I believe many expired in the past few years. I'll dig around a bit though.

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  17. Check with your utility companies first about rebates -- it should be right on their website. I think most utility companies will come out and do an energy audit for free. They will tell you straight up what you can get rebates for. Then check irs.gov for additional government rebates. Some states offer them as well.

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    1. Our utility company unfortunately charges for energy audits. I suppose it's possible it'd still be worth the money, if we were committed to improving the efficiency.

      I found some rather uninspiring federal credits here, that just expired:

      https://www.energystar.gov/?c=tax_credits.tx_index

      http://www.irs.gov/uac/Newsroom/Get-Credit-for-Making-Your-Home-Energy-Efficient

      Arizona has some stuff for solar power, but there's no way we're going that route.

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  18. As an Australian, I'm BLOWN away that a home would run air con 24/7. It's practically unheard of here (but the temps you mention are not!) Most will run it for some of an hour, or to 'get to sleep' but not overnight. It's just too expensive for most, and I think that's the key. If your electricity costs were more, you might want to be more efficient. So it annoys me that the govt and regulators don't see this problem.

    I would, of course, insulate, and or change the windows. To be honest, it's nice to BYO shopping bags, and recycle. But there's always further improvements we could all make (even me). Instead of recycling, we can use less of recyclables, instead refilling (like olden days milk and soft drink in the third world - less labour intensive).

    Lastly to both future renters or buyers, surely better insulation on the windows or the ceiling/roof would pay off for them, which can, in some cases, result in interested parties. I mean, the costs will transfer to them in terms of bills, and so things a vendors done to reduce this should be seen favourably, even if it's not in $$, in a quicker sale etc.

    I'm definitely for the pay to improve method. And I own, I don't say this as a (current) renter.

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    1. Hi Sarah. When I say our AC is on, I only mean it's set to "on" rather than, you know, continually running. It powers on and off throughout the day. Still, probably more than is necessary. We keep it set at 80 in the summer.

      But maybe you Aussies are just tougher than we are!

      If we were trying to recoup the value in a sale, I could see how improvements would pay off. I'm really not seeing how improving the efficiency would noticeably increase rents though, hence the moral hazard.

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    2. I'm glad you took my response well - I have strong views on air con!! I like work, cause the air con is on, and it's seems to be a cost I don't pay for :)

      Perhaps you're right, not a noticeable increase in rent, but maybe something? Hard to know, and it would depend on how hard you advertised it.

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    3. No worries, Sarah. I have issues I'm passionate about, too, and I'm usually in the minority. :)

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  19. I don't blame you for not improving efficiency for the time being. Maybe you will want to spend the cash if you're ever without a renter. $100 isn't that much for an electric bill at all.

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    1. Thanks, Holly! I think we'll sit pat for now. $100 a month (which currently we only pay $50 of) doesn't give us a lot of room to save via efficiency upgrades. Maybe if we're in this house with just the missus and I, we'll re-evaluate.

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  20. I would trade my gas bill for your electric bill any day. And my electric bill runs 167 a month too.

    I looked at the Prescott, AZ area for a place to retire. It seems like a decent place. Not to hot, and a lot warmer than MN.

    You can still improve the property. It will be a marketing benefit. And at some point, if you sell, you will reap the rewards. But if you make it a rental first, then update the property, it is an expense you can write off.

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    1. Prescott is pretty neat, as are a lot of towns north of Phoenix. Once you drive a couple hours up north, it's a different microclimate as you get into the mountains. In fact, in the summers here it's pretty common to see a line of cars heading north on a Friday afternoon, as everyone tries to escape the heat.

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  21. Is it too difficult to roll out insulation in the attic at all? Even in small spaces, you can still get some in, although it may require getting in tight spaces. Also, what about installing a roof ventilation fan? I don't know the cost of good insulation, but I know my dad did it by himself in all the houses he's lived in. I see that the ROI doesn't help you much, but if you're planning on being in the house a bit longer, it may be worth it to do so, especially for the upcoming summer. Also, like an earlier poster said, if you have tenants who do ask for utility bill information upfront, it can allow you to charge more on rent.

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    1. Hi there, Tara. There is literally no access to the "attic" (no opening to a crawl space) since, well, there is no attic. It's one of those mid-century modern homes with a very slight pitch to the roof: we have between 8 inches and 18 inches, I'm guessing between the ceiling and the roof, depending on where you stand in the house. But, one option would be to tear out the ceiling and hang some insulation, kind of like what's shown in the picture in the post. That'd be on option, but I really don't want to tear down all the ceilings...

      As for charging more on rent, I'm not optimistic on that front. I'd say utility costs are probably an ancillary issue for most renters (behind say, the home itself & the neighborhood). I could see efficiency garnering us some money ($25-50 a month, if I'm being really optimistic) but not enough for us to do a major upgrade.

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  22. You have some wonderful eco-wise readers, DB40! So many good ideas to consider. We generally just fight over whether to leave the hot tub in an hourly or twice daily heat mode :) Have fun with the cost/benefit spreadsheet!

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    1. Ha! That's the ticket: we need a pool. I can turn off the AC, and keep the work laptop on the deck while I work from the water. :)

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  23. It's always hard to tell a homeowner what to do as I'm a renter, so let me give that perspective...which probably won't help you. lol! As a renter, it would be nice to live in a place that was as energy efficient as possible. I'd hate to pay more out of my own pocket because the landlord didn't do any fixes or upgrades. For some reason, I lean towards spending a little money to upgrade. I know, easy for me to say right? :)

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    1. That's fair, Tonya. We're both speaking from a position of self-interest, because, hey, we're human. Nothing wrong with that. I do wish there were a win-win here though.

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  24. I guess you could ask your renters if they might be interested in contributing to the cost of the window upgrades as a way to save on their utilities in the long run. I guess it wouldn't be worth it to them unless they were going to be staying for a while though.

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    1. With a long term renter, that might be the win-win I'm seeking, Stefanie. Maybe we'll look for renters interested in 2 year leases...

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  25. Aha so you wrote the post about this then! (Sorry been slow at catching up on posts over the last few weeks!)

    The obvious answer for me would be to do it, but then again I am not the one paying for it, so it's easy for me to say that. Surely new windows would add value to the house for both renters and if you sold alike? And does the spray in insulation really cost that much, I was under the impression that stuff was pretty cheap? Surely if you advertise in a desert area you can include stuff like "electricity bills are $50 due to recent energy efficiency upgrades" and people will logically see the value in that and would pay say $25 extra compared to a similar property without such upgrades?

    I also liked the low tech solution ideas but overall I don't think you'd lose as much money as you'd think by going the whole hog.

    Also consider that if you'd have done it a while ago when you first had the money spare then you would have recouped far more money by now. The best time to plant a tree was 20 years ago, the second best time.... etc.... ;)

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    1. Your logic is sound but I'm not entirely sure renters (or any customer) is that rational. I think the cost advertised on the rent is more powerful an anchor than the impact of lower utilities might be.

      As for the spry in insulation, that's not the rub: it's the fact that there's no access to the place to spray it. We'd have to completely tear out all the ceilings to get insulation in there. I shudder to think about the costs (or DIY effort) to do all that.

      As for not losing that much...I don't want to lose ANY. ;)

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