Utilities to Pay or Not to Pay ?

Question

I am getting started in rental property investing as drawing my first set of lease agreements currently. Should I have my tenants pay all of the utilities? I know it would make the most sense to have them pay but I am targeting college students. Wouldn't it make the property more attractive to younger people if some of the utilities were covered ? Thank you !!!

Nathan Gesner · Answer

HOW TO SHARE UTILITIES 101

You have a property with two or more units and the utility meters are shared. There are a few options.

1. Pay to separately meter the utility. This can be very expensive and is usually the worst choice because you can't justify the cost.

2. Charge the tenants a higher rent rate and include utilities with their rent. This is the simplest method, but it also means your tenants are more likely to abuse the utilities by leaving windows open with the heat or A/C running, leaving lights on, ignoring the toilet that constantly flushes on its own, etc.

3. Pay the bill yourself, then reimburse yourself by charging the tenants based on a formula. This takes a little more work, but it's the fairest and reduces the likelihood of tenants that squander utilities.

If you choose #2 or #3, there are considerations:

Start with an average. Use varies throughout the year. Heating costs go up in winter, as does electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a historical average based on the last year of use. It won't be 100% accurate, but it will be close enough. I recommend you do this annually to adjust for utility increases and other variables. If your average heating bill is $150, you may not collect enough in the winter months when the bill reaches $225 but you'll collect extra in the summer when it drops to $65. If you base your tenant charges on the historical average, you should come very close to collecting the entire amount over a one-year period.

Charge a higher rate. If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility. If the bill is $100 a month split between four units, increase it to $120 and charge each tenant $30.

How to calculate charges. Don't make it more complicated than it has to be. If you have four 2-bed/1-bath units with the same appliances, split it four ways and call it a day. You can make minor adjustments based on the type of appliances (dishwasher, clothes washer and dryer, air conditioning, etc.) and the size of the rental. If Apartment A is a 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath with no washer/dryer, Apartment A should pay a higher rate. Another option is to split the cost based on the number of occupants in each unit but this also means you'll need to adjust the charges as tenants move in/out, so it requires more work and I wouldn't recommend it. I recommend a simple spreadsheet to check your math and it will make it simple to adjust each year.

End the complaints. Tenants may complain about your method of calculating how much each unit pays. They think it's unfair because they only shower once a week but can hear the upstairs neighbor showering twice daily. You can end this by showing them an actual utility bill. Why? Because a large percentage of the charges are base fees that do not change based on use!

I just looked at a utility bill with a total charge of $184.12 but $116.50 is from base fees! If I divide this bill by four units, each tenant would pay $46.03. If they were separately metered, each tenant would pay the $116.50 base fees and their individual use, which would be 3x higher than what they pay when sharing a meter.

There are many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.

Charles Carillo · Answer

@Bryson Williams

You can check other similar properties and see what they are offering, but I would always have your tenants pay their own utility bills.

Roque Miranda · Answer

Hi all, I'm looking into investing on Montgomery AL, any lenders an also real estate professionals that you guys can recommend for the area?

Thank you all!

Theresa Harris · Answer

Have them pay. If you include it in the rent, they will use more than you expect.  If you are worried about them not paying, require them to send copies of statements for any utilities that are tied to the property (ie if they don't pay, you have to).  If there are utilities that can't go in the tenant's name, have them pay you for those each billing cycle when they pay the rent (ie do not include it as part of the rent, it is extra).

Bruce Woodruff · Answer

I would never pay the utilities as a landlord. I have known landlords that got completely hosed. By accident or on purpose...

If you have no choice, then make sure that you are notified if they start to fall behind...

Jake Knight · Answer

This could be contingent on the market you are in so you may want to source locals in your area and how they handle.  Here in Indy, as long as utilities are separately metered, we will require tenants to cover their own.  If they are not separately metered we would include it with the rent or do flat rate billing based on average utility usage.

Becca F. · Answer

@Bryson Williams

Typically you would have your tenants pay their own utilities since you wouldn't want to cover someone's high water or electricity/gas bills but some cities will put a lien on your property if certain utilities aren't paid. If your city has these laws, I would find a way to check each month to see that your tenant is paying those utilities - checking the account online? For example, an investor I know had lien put on her property in San Francisco because the nightmare tenant didn't pay the last trash/recycle  and water bills before tenant moved out. I pay my tenants' utilities (a SFH) and they reimburse me (stated in the lease), kinda of a hassle I don't need the city putting a lien on my property.

On one of my Indianapolis area properties I have to pay the trash/sewer fees (a fixed amount that might go up every 3 to 4 years). The city said owners need to pay it, otherwise if the tenant forgets, the city will put a lien on the house. I just add that amount to the base rent in the lease.

One option would be if you cover a certain amount and if it goes over X  amount they need to reimburse you.

Utilities to Pay or Not to Pay ?

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