Green leasing is becoming a popular strategy among real estate investors looking for new trends in real estate investing to make more money. A green lease would not just boost your rental income, but it will also contribute to a sustainable and environmentally friendly real estate investing.
What is green leasing and how does it work?
A green lease is a rental contract between a landlord and a tenant which establishes the framework on how a rental property should be used to ensure the least amount of impact on the environment. The importance of green leasing stems from the fact that 30% of energy consumption is attributed to the real estate sector, and with an increasing emphasis on carbon footprint reduction, this high percentage can be decreased by adopting sustainable real estate investing approaches such as green leasing.
Green leasing is a method often used to rent out a “green building”, a term used to describe buildings or real estate properties that use environmentally responsible and resource efficient processes throughout the life cycle of the building. The terms of a green lease contract are negotiated between a landlord and a tenant, resulting in a set of provisions and rules to be implemented by both parties to maximize the effectiveness of the green lease.
Green leasing a real estate property places obligations on both the tenants and the landlords to improve the environmental performance of the rental property. Landlords endure the upfront cost to make energy saving improvements, and tenants should respect the terms of the green lease to fully benefit from it.
For example, a green lease can include that indoor temperature should not be higher or lower than a certain degree. The landlord’s obligation is to provide a thermostat to control the temperature, while the tenant has to monitor the performance of the device to keep the temperature within the set limits.
How can green leasing boost your rental income?
- Reduce energy consumption and cut operating costs: Green leasing a rental property is a guaranteed way to lower your expenses. Studies have shown that green leased investment properties have lower energy consumption by about 25%, thanks to the environmentally sustainable strategies that are agreed upon between the landlord and the tenant. In order to boost your rental income with green leasing, you have to make sure that the energy cutting strategies are clearly defined in the lease agreement document.
- Have happier and long-term tenants: Green buildings in general attract more tenants, and have less turnover. In other words, by green leasing your rental property, you ensure higher occupancy rates (or alternatively lower vacancy rates) and, therefore, higher net operating income (NOI). From a commercial or office real estate perspective, green leasing is attractive to companies as part of their corporate social responsibility (CSR) in the sense of reducing their impact on the environment and providing better work conditions (air quality, for example) for their employees. However, the importance of green leasing in residential real estate investing should not be underestimated either.
- Gain competitive market advantage: Let’s be honest, people are willing to pay more for fancy titles and environmentally friendly real estate properties. Green leasing your rental property can boost your rental income by offering a unique product in the rental market. Environmentally responsible companies as well as individual tenants look for green real estate properties to rent, which means you can increase your rent and still compete in the market at the same time.
- Take advantage of tax deductions: Another way in which green leased properties can boost your rental income is through tax deductions and credits. The government offers these incentives to encourage real estate investors to implement environmentally sustainable and energy efficient solutions. For more information about tax deductions eligibility for commercial buildings, please refer to the 179D commercial buildings tax deductions. Residential rental properties are also eligible the such tax deductions, such as the Energy Investment Tax Credit (ITC).
Boost your rental income by adopting these green building strategies
As a landlord, you can boost your rental income by adopting the following strategies to your rental agreement “green lease”:
1- Use energy efficient appliances: Old appliances like refrigerators and dryers use a lot of power, make sure to include in the green lease that tenants must only use new and preferably Energy Star appliances.
2- Use energy efficient lighting: Switching to fluorescent lights or LEDs can significantly reduce energy consumption and lower your expenses. Using motion detecting lights can also reduce energy costs, since the lights only turn on when you need them.
3- Use programmable thermostats to control indoor temperature: In the case where you have to pay the heating and cooling bills for your tenants, it is good to use programmable thermostats that can lower heating costs if used properly. However, the optimal situation is when tenants pay for their own bills, which would lower your expenses and also encourage them to conserve energy.
4- Use water saving devices: Low-flow shower heads, faucets, and toilets can reduce water use by about 50%. Use these devices to boost your rental income and lower your expenses.
5- Develop a procedure of monitoring energy usage: Monitor the energy performance of your rental property and check regularly if tenants respect the terms of the green lease. A good strategy here would be including tenants in the process by letting them monitor energy performance.
The bottom line
Green leasing your real estate property is a good strategy to boost your rental income. Start by monitoring the energy performance of your rental property and check where you can make improvements that can lower your expenses. Finally, make sure to have enough education about investment property analysis and all the metrics related to it.
Use Mashvisor’s investment property calculator and property search engine to find the best real estate investments!