Owner paid utilities (rent all inclusive) - Raising rents after we purchase to cover utilities - Should we steer clear or is there opportunity???

Question

Hi BP Community!

In looking at several multifamily properties, I am seeing some that don't have separate meters & the units are rent inclusive.  The problem though, is that the current "all inclusive" rents being paid are no greater than units where the tennant pays the utilities separately.  Not exactly sure how the current owner is making the property cash flow this way, maybe that is why they are selling...

Has anyone ever ran into this situation?  Should we steer clear of properties that are "all inclusive" or do you see potential here too?

Anyone have experience with picking up an "all inclusive" property & then raising rents to align it more with the market?

Any thoughts are greatly appreciated.  Thank you!

Peter MacKercher · Answer

It's all about the numbers, so if you don't think they can cash flow with their rents and you don't see a way to push rents, then they're bad deal. In my market 4-family properties are almost exclusively owner-paid, but they still make money. If you have the option of tenant-paid utility properties for the same rents then go after those.

David S. · Answer

I would look for more properties in the area for a better and more accurate rent survey.  If his/her rents are the same as tenants paying for all utilities in many other properties, then his/her rent is below market value.

There are many single metered buildings for water in my area.  And can you guess the 1st question asked by prospective tenants?  Is water included?

Some owners have separate metered their buildings only to find out that they had to lower rents to be competitive with the market and got the same money.  One particular owner chose NOT to meter separately the rest of his buildings.

If you want to separate meter it, keep this in mind.  If you don't, you need to keep a lid on things i.e. water saving toilets, landlord thermostats, keeping a close eye if tenants are having several other people live there, car washing services on premises, etc.

In the end, it all depends on how it cash flows and your tolerance.

Kelly N. · Answer

Hi Robin,

Our first purchase was a triplex with the landlord paying all utilities and I don't regret it.  Rents were on par with similar units where the tenant was paying some utilities (water is typically not split here) however the actual condition of the units we purchased warranted the cheaper rent ;)  We have made improvements and increased rents, and have plans to split the gas and electric up when we upgrade the electrical system, but for now the property produces cash flow as is.

I would call the utility company and get last year's average bills, that should give you a good budget number to go with.  We've had a couple of record cold years here in Michigan so I would bet the numbers would be at the same level or better this year.

I find we get a lot of interest in these apartments, and people seem to really appreciate knowing they won't have a high bill in the winter.

Kelly

Ellis San Jose · Answer

I really don't like these type of buildings at all. There is no expense control. Get bids on sub-metering and include it in your calculations for an offer.

Gilbert Dominguez · Answer

You should understand what, " Market Rates" are and mean. If most landlords in and around your area are charging $X for similar units as you have and are including the utilities in the rents then that is what you should expect to charge including utilities to your tenants. However it's all up to you. You many want to make a separate charge for utilities whether you have separate metering or want to average out the rents and include the cost of utilities to be charges to your renters. You may find that your rents will be above market rates but if that is what you want to do and that is what works for you then so be it.

Your renters or potential renters may raise this issue with you or they may not and just base their decision of whether or not to rent from you based on your quoted rental rates.

Electrical and gas separate metering is not that expense to accomplish but usually you may find that paying of a separate water meter may be cost prohibitive but then again if you think it is worth the extra expense so that you can manage better your property then you can choose to have all separate metering installed and pay for it.

Robin Secord · Answer

Good suggestions - thank you!

Owner paid utilities (rent all inclusive) - Raising rents after we purchase to cover utilities - Should we steer clear or is there opportunity???

Most Popular Reply