Building the Investment Case for Green Homes
Economic Benefits of Sustainable Real Estate
Feb 03, 2010
By
Sally Russell
The common misconception that investing in energy efficient homes is more expensive
than traditional homes is being upended.
Many buyers have heard that prices for green homes are higher; therefore, requiring
greater down payments and less affordable monthly mortgage payments. Similarly,
some builders have shied away from green construction projects as the materials
for such homes can be higher.
But these misconceptions are being reversed as more homebuyers realize higher cash
flows from energy savings and preferential mortgages—not to mention higher
resale values for their homes. In some areas, the appraiser's rule of thumb is that
green homes are valued at $20 more for each dollar saved per year in energy costs,
according to Jim Graham, who has been a green developer for nearly 40 years.
Builders, too, are seeing that green homes, while they can be 1-2 percent more expensive
to build, can be more profitable than traditional homes, according to the Turner
Construction Company 2008 Green Building Market Barometer. Recently, Adam Gallegos,
broker for Arbour Realty
in Arlington, Va., found that some green new builds in his area sold for $100,000
to $175,000 more than their non-green counterparts.
"Builders are just catching on to the opportunity," he says.
Increased Purchasing Power
But it seems that the government isn't just catching on to the value of such a home
as they enacted EEMs, Energy Efficient Mortgages, 15 years ago—much before
the growing popularity of "green." Energy-efficient homes with an Energy Star or
a home energy rating can enjoy the benefits of this preferential mortgage. These
mortgages allow the additional cost of energy-efficient improvements to be included
in the mortgage. And they stretch the debt-to-income ratios for borrowers so they
can afford a larger loan amount at the same or better rate than traditional mortgages.
Energy Improvement Mortgages (EIMs) are another form of preferential loan for energy-efficient
homes. EIMs allow buyers to purchase homes that will have energy-efficient improvements
made to them by adding the cost of the improvements to the loan amount but not increasing
the down payment. EEMs and EIMs are offered through Fannie Mae, the Federal Housing
Administration and the U.S. Department of Veterans Affairs.
Increased Cash Flow and ROI with Green Renovations
Once considered a luxury, remodeling is now being looked by many at as a way to
save money.
John Lala, president of Rycorp Inc., a remodeling company in Virginia, says that
until the recession, his business was driven by large-scale remodeling projects,
such as $60,000 kitchen remodels. Now, 75 percent of his clients are focused on
energy-efficiency, balancing overall cost against long-term savings.
"Most of my customers are motivated by saving money," Lala says.
And in the long-term, it seems green renovations can do just that. Such energy-efficient
home improvements as upgrading windows, reducing air leakage and increasing foundation
insulation can be recouped in three to four years, according to the 2002 Economic
Analysis for the Maine Residential Energy Standard (Maine RES). The savings-to-investment
ratio for these measures is between 1.4 and 4.2—meaning for every dollar invested,
the return is between $1.40 and $4.20 over the life of the energy-saving measure.
The Obama stimulus package's $1,500 tax deduction for energy-efficient home improvements
made in 2009 and 2010—along with rebates on energy-efficient products—makes
the return on investment even greater. Michael Turcotte, of Turn Cycle Solutions, which does energy audits and gives
advice on energy tax incentives, says the cost of one of their basic packages of
energy-saving upgrades is recouped in seven years or less.
Some accounting firms are also developing specialties in green investment and tax
issues to help clients navigate the increasing number of tax incentives for building
green. Matthew J. Bonney, of Citrin Cooperman & Company LLP, a New York accounting
firm, says he acquired a deep understanding of the LEED certification process from
a tax and accounting perspective to offer guidance to clients interested in green
construction."Most people want to take advantage of the energy-efficiency tax write-offs,
but they don't have a clue about how to go about it," Bonney says. "There is a whole
lot of money available just being left on the table."
Cashing In on Energy Savings
Tax write-offs are just one way to save from energy efficient improvements. In many
cases, green properties can cost more to build and buy than traditional properties,
especially when adding such high-price items as solar panels, solar water heaters
and batteries. But when savings from reduced energy bills are factored in, green
homes can actually be less expensive than traditional homes.
On one end of the green home spectrum is the net-zero home—where the home's
energy consumption is offset by the energy it produces, resulting in zero net carbon
emissions. This is achieved by being off the energy grid supply, or by being on
it, but harvesting energy on site.
While the cost of supplying one's own energy can be significant, there are tax write-offs
for the improvements, which reduce the actual cost of the home. When the cost of
energy is zero, hundreds of dollars each month in utility bills can be saved, effectively
reducing the cost of owning the home.
Stuart W. Rose, Ph.D., author of Sustainability (BookSurge) and principal
in a net-zero subdivision in Virginia, says that solar homes can add to cash flow.
For example, solar panels add $33,000 to the price of the home. Thirty percent of
the $33,000 is an immediate tax deduction. The remaining $23,000 will add about
$115 to the monthly mortgage. So the mortgage goes up, but the utility bills go
down. And if the utilities drop by more than the increase in the mortgage payment,
then the owner saves that much money each month. Additionally, if the owner can
sell the excess power to local utility companies, he gets that much extra cash flow.
Even when a home is not net zero, homeowners can increase their cash flow with an
energy-efficient home. Energy Star qualified homes, which use substantially less
energy for heating, cooling and hot water systems, save between $200 and $400 annually
in energy bills. And if a home comes with energy-efficient appliances, an additional
$80 can be saved in utility bills and maintenance savings can be substantial. Over
the average term of seven to eight years that people live in their homes, this adds
up to thousands of dollars, according to the Energy Star Web site.
Greater Resale Value
Increased monthly cash flow is not the only way homeowners profit from energy-efficient
homes. According to the Maine RES study, home resale values increased approximately
$20-$25 for every dollar decrease in annual fuel costs after energy improvements
were made. For a house with annual savings of $200 to $500 in utility bills, this
translates to an increase in value from $4,000 on the low end to $12,500. This increase
in home value is in addition to the expected benefits of preferential financing
and positive cash flow.
Mark DeCarlo concurs. The host of the upcoming series, GreenHouseVideos—which researches and demonstrates
energy-efficient products for homes—has found that homes renovated with green
features have a significant market advantage over traditionally renovated homes.
Buyers want to reduce the money they spend on utilities, so they are looking for
energy-efficient homes. They are turning to newer, green homes rather than homes
built without consideration for energy efficiency.
"It's the difference between buying a used Prius and a used Hummer," DeCarlo explains.
Green Rentals Increase Returns
Just as green homes have greater resale value, green rentals command higher rents.
Sixty-five percent of real estate executives reported that green rentals earn higher
rents and 49 percent reported higher occupancy rates, according to the Turner survey.
Operating expenses are generally lower on green rental properties, with lower energy
costs and lower total lifecycle costs of appliances, and heating and cooling systems—giving
investors a higher return on investment.
Ari Meisel, real estate investor, developer and author of the book LEED Materials:
A Resource Guide to Green Building (Princeton Architectural Press), says
that his green rental properties in the Hamptons garner 25 percent higher rents
than similar, non-green properties. And while the resale market is still falling,
green properties hold their value.
"Green properties definitely have a competitive advantage. It's no longer a plus
to be green. Now it's a matter of being greener than everyone else."
Ari Meisel
Real Estate Investor, Developer, Author
Builders Jump in to Fill Demand
Many in the industry see the green trend as being in its infancy, with the opportunity
for tremendous growth. In fact, green building is expected to grow from $12 billion
in 2008 to $60 billion in 2010, according to the Turner study.
As builders respond to the increasing demand for green housing, the perception that
energy-efficient construction is more costly is being challenged. Many builders
once thought that more energy-efficient buildings meant higher construction costs
and reduced affordability for buyers. But the average premium of green buildings
over traditional buildings was less than 2 percent, or $3-$5 per square foot.
In addition, the Turner survey of real estate executives shows that 72 percent of
those in the industry believe that green properties have higher value than their
non-sustainable counterparts, and 52 percent believe that green properties have
a higher return on investment.
The number of green developers has risen to meet this demand. For example, a surging
green home building market in Las Cruces, N.M., is being led, surprisingly, by retirees,
according to Jim Graham, a green developer who started Sun and Earth Inc. in Las Cruces, N.M. in the 1970s.
"People on fixed incomes tend to think more about the long-term savings [from energy
efficient construction] and are often more environmentally conscious," Graham says.
And where there were only a few green builders in Las Cruces a couple of years ago,
many construction companies are now promoting themselves as green builders.
"I don't know if they have a green conscience, but they sure see the market in it,"
he adds.
Start the conversation…™
Investing in green real estate can offer such benefits as tax incentives, increased
value, increased cash flow and return on investment, competitive advantage and reduced
environmental impact. Whether you are a buyer, builder or seller, how can you profit
from greening your property?