Owner vs. tenant paid utilities

[Will Barnard]

This is a debate that occurs often in the 50% rule.
Some argue that with owner paid utilities, your expense ratio could very well be much higher than the average 50% while others argue that the rental rate increase for owner paid utilities makes the utility cost average back out to 50%.

I personally do not have any verifiable data to back up either argument but my opinion has always been that owner paid utilities gives tenants 0 incentive to conserve and even increased rents could not prevent expense ratios from climbing higher than 50% averages.

What are your thoughts?

[Steve Babiak]

Sometimes as a landlord there are utilities that are tough to pass along to the tenant, so I end up paying those. Examples:

1. I have a property where the trash and sewer bills are billed annually with the property tax bill. Tough to put this onto the tenant (directly), so these amounts get divided by 12 and the rent gets an appropriate boost by building in that cost.

2. I have a couple of properties where the sewer is billed in arrears by one quarter. So the sewer bill for February of this year still hasn't been produced by the town. Tenants hate paying utilities, but they hate it even more when it is a utility bill for usage that they didn't use! With these sewer bills, I use historic figures to estimate what the tenant should be paying monthly and build that into the rent; if actual consumption is above that, then an appropriate rent increase has to be made to cover the usage above the estimate.

3. I have a couple of properties where the trash is paid ahead by a quarter. The trash fee is fixed, so dividing that by 3 and building that into the rent is the approach I take.

4. And I have a duplex where there is only a single water meter; the water and sewer get billed together for the actual month - but splitting that between the two units isn't something I want to argue with tenants over. Just have to watch the consumption and advise them that more consumption will lead to bigger future rent increases - and hope that they care about that. and of course some part of the rent is an allocation that goes toward paying that water/sewer bill.

That same duplex has two gas meters, so they pay their own heat, cooking and hot water. Three electric meters there means they pay their own electric (and I pay for the "public lighting").

Definitely avoid paying utilities for tenants, even if it means giving them a lower rent in exchange. That way they have the incentive to conserve.

And of course, in many multi-units, there will be some common areas where utility usage has to be paid by the landlord. As well as any utility use by vacant units (refrigerators that may be running, heating in winter, cooling in summer, etc).