Understanding Lease Agreements and What About Utilities?

Question

A happy Saturday afternoon to you all!

I've got two short questions for you

(1) Is it more profitable/smart to include utilities in the rent or make the tenants pay utilities and have a slightly lower rent? I know the answer will vary based on location, price-range, size of the complex etc... so perhaps a few mock scenario descriptions would be helpful.

(2) One of the BP Podcasts (I believe it was between shows 1 and 70...I know that's not very helpful), the guest was talking about the very detailed and length lease agreement that he has with his tenants and that he had placed it either here on BP or his company's website. Does this ring a bell? May be the same guy who talked about 'training your tenants'.  If they're two separate people, I'd like to know who each is. I was hoping to figure out who this was so I could look at and study their lease to learn more about what goes into a well-structured lease :)

Account Closed · Answer

Except you will not be able to pass along a $700 a month expense without a decrease in rent.  So you have not forced any value.

Colleen F. · Answer

Also when you are paying tenants do not conserve. There are studies that show more use if the landlord pays. We pay utilities and the one thing I noted was that water use is higher because we pay. They are also more likely to close doors if they pay heat.

James Hutson · Answer

Gotcha!  Great stuff, I have been looking over their site and will keep it in mind.

Ashley Pimsner · Answer

Exaxtly, you are not going to get the same rent with tenants having to pay their own utilities but you will still be able to increase NOI which increases value and adds cash flow to pay down the debt.

Check out this link for info on how to pass on utility costs to tenants if property not separately metered.

http://www.multifamilyutility.com/rubs.html

James Hutson · Answer

I appreciate the feedback, everyone!

So if you pass along the $700/m to your tenants, you 'save/spike' your income by $700/m. Except now you have to decrease rent so it isn't really an extra $700/m, right? Perhaps a little less, but still, an increase in casfhlow nonetheless.

Let's say you don't need this extra couple hundred bucks, so you take it and turn it into monthly extra principle payments on the loan.  You'll pay off the loan more quickly so that down the road, you get an even greater casfhlow when there is no loan to pay off.  How would the equity and appreciation of the home be affected as a result of this extra principle payment method?

Thanks!

Michael Noto · Answer

Whether you include utilities in the rent in my opinion is completely based on what the norm is in the area you are renting in. If it is not the norm than why do it?

Ashley Pimsner · Answer

@james hutson, if you're talking about residential loans which are units between 1 and 4, then  it is completely up to you as to how you bill out the utilities, as you can either do it as you suggested with a slightly higher rent and include utilities, or  have the tenants pay for utilities individually. Personally if I have the option I never pay for utilities

However, if you're talking about a commercial deal then anyway that you can increase your net operating income (NOI) by decreasing your costs, such as utilities, becomes money in your pocket  through forced appreciation. Increased NOI/Cap rate= increased value of a commercial deal.

Ex. Decrease utility expense, formally paid by landlord and passed onto tenant, by 700 a month which increases NOI by $8400 annually/ local cap rate of 10%= additional $84000 in forced appreciation for commercial deal.

Hope that helps.

Michael Worley · Answer

It is preferable for the tenants to pay their own utilities because you can't control the usage and  you have to pay the bill if they don't on a mastered metered property. Look at the income statements for any mastered metered property and that always have an uncollected utility expense.

Christopher Telles · Answer

1. It depends on the physical situation of the utility meters, in addition to what's regionally acceptable rental practice.

If the utility meters are separated per unit you have an option as the landlord to require each tenant to subscribe to their own individual utility service(s). However, if the utilities are service through one main meter then your option become cumbersome to bill out prorata. You'll then need to find a fair approach to ensure you're actually billing for an estimated quantity of service.

2. Go back and listen to those podcasts to find the individuals speaking, and then follow their direction or links to the leases.

Understanding Lease Agreements and What About Utilities?

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