What is your experience making the tenants pay utilities on a single meter

Question

I'm evaluating an apartment complex (two buildings) where the owner pays water, gas and sewers. During the inspection I noticed that some toilets have constantly running water and the wall heaters were still heating despite 110 degrees outside and the evaporative cooling running full blast. The tenant pays for electricity but obviously not high enough otherwise they would have turned down the heaters.

So my question is, is it possible to convert the leases after purchasing the property (probably one by one as they expire) and make the tenants pay utilities. Since the buildings are pretty old, I suspect re-piping would be extremely expensive and the hot water is still provided by a single water heater per building.

What are the pitfalls of doing so? The rents are market but most of the other places are paying for their own heating and in some for their own water but the tenants are people on disability and food stamps.

How did you organize the payment? split evenly between the apartments, per person or some other way. How do you deal with the cases where the bill comes 2-3 months later?

James Wise · Answer

Build these costs into the rent.

Scott Bowers · Answer

Hi Bobby -

Sometimes problems like that are hidden opportunities to add value. When dealing with water usage expenses, I like going the route Marcia advised insomuch as finding ways not just to stop the running toilet but installing toilets that use less water. The techology in this area has resulted in higher quality with increased efficiency.Speaking of technology, while researching this topic the other day, I found a company called "Utility Management Solutions" that claims they can install a submetering solution regardless of the type of piping. I haven't used their services myself, but it may be worth examining.

Good luck with your evaluation and please keep us posted!

Scott

Marcia Maynard · Answer

In addition to building the utility costs into the rent, I would also do an energy audit. The local utility companies often will do this for free. It is an opportunity to identify energy wasters and educate tenants. If the tenants conserve and the utility use goes down, I would offer a rebate to the tenants for their participation in utility conservation. I would also be proactive with water use by installing water saving shower heads and toilets. More frequent site visits can also pay off; get them on a maintenance inspection schedule and address energy wasters as you see them.

Michael R. · Answer

I would look at your market. I have debated this with my partners on the triples we own in NY. My answer is that since utilities are one factor of the unit, I take into account more factors.

For example, if the apartments down the street pay all utilities but charge more rent, then I adjust my rates so that the net cost to the tenant is about the same.

I hope that helps.

Bobby Narinov · Answer

@Scott Bowers This is pretty good idea. I'll try to see if they are servicing my area.

Kelly N. · Answer

Hi-

I have two triplexes, one with gas and electric split and the other without, we pay the water bill at both since it isn't split.

At the split triplex, we are paying gas as well since one unit's boiler heats the common area and the other heats the water for the common washer and supplies gas for the dryer.  I let prospective tenants know what the average electric bill is when marketing the apartment, and have never had an issue renting it.  It is a fairly efficient house (I love boiler heat!) and the gas bills aren't too bad even during the last two record breaking winters.

At the other, we have plans to update and split the electrical at some point, add electric heat and water heaters and then we'd be able to be just paying water there.  The tenants there REALLY like that utilities are included.  Gas bills do get high there but the house has little insulation (just put some in the attic, no idea what is in the walls but that is in the plan too) but I factor the average bill into the rent anyways so we've done fine there- winter months just make the books a little lean but summer makes up for it.

I have considered splitting the single utility bill based on square footage, but feel that this would just open me up to tenant on tenant squabbles- so and so takes long hot showers, this one leaves the window open, etc etc.  That seems like a headache  waiting to happen so we scrapped that idea.

We just purchased another property with split utilities except the water, and the landlord was paying everything.  They recently signed a new lease for one unit shifting the gas and electric on to the tenant, and I am going to do that when the other three are up as well.  The utility company gave me the average monthly charge for each which I will let prospective tenants know.  I am curious to see how marketing these will go compared to my other two!

Kelly

Joel Owens · Answer

Bobby find out what is typical for the area.

If most other building owners pay the utilities for tenants included in rent then you would be wasting money trying to separate utilities or bill tenants directly. As you said many of these tenants live hand to mouth and any minor change rocks their world. The tenants would go in mass exodus to another complex.

Now if your complex just hasn't been converted and tenants in the area are used to tenant paid utility then you might gain benefit from it. If you cannot get a direct connection where the tenants pay then the landlord is still responsible for the bill you just bill the tenants. Understand that some tenants will pay you, some will pay late, and some will not pay at all. You will have to decide if it's worth it to evict the tenants over paid rent but unpaid utility and spend possibly thousands in costs to rehab the unit or keep pursuing them over time for the money.

Friend of mine owns a 130 unit. 80% pay utility, 10% pay late, the other 10% he writes off rather than evict.

If you buy a property with tenants like this it's all part of it so make sure you are getting not just  a little more return but a VERY high return for taking it on.

Been there and done that. I have no interest doing it again. Tenants that are uneducated and low income need a lot of hand holding and it's almost like having kids.

The higher functioning level of tenants that have college degrees are more professionals and self sustaining with payments but those units cost more per door to buy which is out of some buyers reaches to start. Seniors can be good but have limited income for rent increases. Pluses and minuses to everything. I would rather have tenant paid direct utility at an 8 cap then seller paid at a 10 cap. It is THAT big of a deal.

Isaac Rowe · Answer

I would speculate that on a property like that if the tenants are on food stamps etc...That there is probably a reason the owner is paying those bills.  Because the tenants won't take care of them responsibly.  What you normally find in the Cleveland area anyway is that landlords who pay for those bills, get a little more in rent, and vice versa.

I would probably recommend evaluating the property as is, and making sure your ok with having responsibility for those bills, because even if you do pass them along to the tenants, they may end up coming back on you.

Jeff Kehl · Answer

I'm in the middle of splitting utilities on my 20 unit building. The best answer is buy a property without landlord paid utilities... I was lucky enough to have pretty good market demand though so I just started raising rents. We got the rents all up and now are switching them all from gas boiled water heat to electric. Has been a very large project because it involves rewiring from original 1930's wiring to current code. Hoping to have that done by this winter. I'm not sure splitting the actual water will be economic but I'll reevaluate next year after I see how the heat goes.

Che Chiu Wong · Answer

Good question Bobby.  I have a 2-family house where it is shared heat.  1 unit is a 2 bedroom (smaller) and another is a 3 bedroom (bigger).  So I bake in the heat bill into the lease, with the smaller unit paying 40% and the other paying 50% ( I pay the remaining 10%).  The reason of that split is because I would like to make sure each tenant doesn't feel getting ripped off (which the smaller unit may think so if they pay 50%).

So each month I will advise them how much the gas cost it is going to be, and add to the monthly rent invoices that are sent out.  A lot of times the tenants will be late for a month (for the gas portion), but will just chase just like any back rent.

What is your experience making the tenants pay utilities on a single meter

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