A $26,000 upgrade, a $1,000 saving for the tenant: who wins if NSW makes rental efficiency compulsory?

$26,000. That is the number to hold onto.

Renew, a sustainability not-for-profit, costed three upgrade packages for a typical 1970s brick house across seven NSW climate zones, as reported by realestate.com.au on 6 October. The minimum package came in at around $15,000. The moderate package, the one Renew calls the sweet spot, at around $26,000. The top package at just under $34,000.

The moderate package is ceiling and wall insulation, draught sealing, window awnings, two efficient reverse-cycle air conditioners, heat pump hot water and a 4.5kW solar system.

Renew's modelling says that package cuts a tenant's energy bills by two-thirds to three-quarters. More than $1,000 a year, with the house held in a healthy 18 to 25.5 degree range.

The landlord writes the cheque. The tenant gets the saving. That is the arrangement NSW is now deciding whether to make compulsory.

What has changed

NSW is considering minimum energy efficiency standards for rental properties. Consultation closed on 31 May. The government's findings are expected later this year.

Nothing is law yet. Treat every number below as a planning assumption.

But the direction is clear enough to price. Renew says most rentals score two stars out of ten. Energy Consumers Australia found 68 per cent of NSW renters avoid heating or cooling to save money. And 75 per cent of landlords either support minimum standards or do not oppose them. Rules with those numbers behind them tend to arrive.

The maths nobody is putting in the headline

Renew points to the NSW Government's Home Energy Saver Program, which offers zero-interest loans of up to $15,000. Financed over 20 years, Renew puts the moderate upgrade at about $1,600 a year.

Set that against the tenant's saving of more than $1,000 a year.

On those two figures alone, the owner is out $1,600 and the tenant is up $1,000. That is a transfer. Anyone telling you the upgrade pays for itself on the energy bill is reading a different report.

So where does the owner's return come from? Two places, and both depend on the property.

First, rent. A separate report, The Efficiency Edge, found efficient homes rent for more than comparable homes in the same areas. The examples cited: an efficient WA property renting for $300 a week above its suburb median, and an efficient ACT property for $350 a week above. Those are individual properties in other states, so do not paste them onto a Sydney unit. But even a fraction of that premium changes the equation. A $50 a week premium is $2,600 a year, which covers the $1,600 repayment with room to spare.

Second, retention. Renew's argument is that comfortable tenants stay. Every week a property sits empty between tenants is a full week of rent gone. If an upgrade means a tenant renews once instead of leaving, the two or three weeks of vacancy you avoid can be worth as much as the whole year's repayment.

What this means if you have equity or cash

If you own a NSW rental, especially older brick stock, you now have a capital expenditure line to add. Somewhere between $15,000 and $34,000 depending on how far you go, with up to $15,000 of it financeable at zero interest.

If you are using equity to buy a NSW rental, this changes what you should pay. A 1970s brick house that needs the full package is, in effect, $26,000 more expensive than its contract price. A property that already has insulation, solar and efficient heating is carrying a credit most sellers have not priced in.

That gap is the opportunity. Until the rule is settled, the market will keep pricing those two houses the same.

The decision, with the trade-offs on the table

Owners of older stock have three options.

1. Upgrade now and finance it. About $1,600 a year on Renew's numbers. Upside: a possible rent premium, lower vacancy, and the work done on your schedule rather than a deadline.
2. Wait for the rule. You keep the cash for now, but you give up control of timing, and you may end up doing the same work alongside every other owner in the state.
3. Sell before the rule. You hand the $26,000 problem to the buyer, who, if they are paying attention, will take it off the price.

Buyers face the mirror image. Pay less for the two-star house and budget the upgrade, or pay a fair price for the efficient one and skip the project.

The expensive mistake is a fourth option: buy the two-star house at full price, assume the rule never arrives, and discover a year later that your yield has an extra $1,600 a year leaning on it.

Two streets, two outcomes

A rent premium for efficiency is set street by street.

In a street where most rentals are 1970s brick and nobody has upgraded, the first efficient house gets the premium and the tenants who stay. In a street full of new townhouses that already meet the standard, the same $26,000 earns you compliance and little else.

Whether that money is an investment or a cost depends on what the other houses on the street are offering, how long comparable homes sit vacant, and who is renting there. Two streets in the same suburb can be having completely different outcomes. That is the data that decides whether this rule makes a property a better investment or a worse one.

Right asset, right street, costed before you sign. Structure, not timing.

Want to see how we test a decision like this street by street before a contract is signed? Join Jacob's free live webinar.