Submetering Utilities in Multifamily

[Arthur Wang]

BP- I am looking at a MFH in Cincinnati that is currently landlord paid utilities. I have heard of transitioning properties from landlord to tenant paid utilities but haven’t gotten into the nitty gritty of what that process would entail. What are the top 3-5 things to consider when installing sub meters to a property? I would imagine that I would have to work with the city on such a project, in addition to coordinating with the current tenant base as to not adversely affect them. Open to suggestions and referrals! -Art

[Zach F.]

Unless you are working with a 5+ unit building as a value add deal (decrease expenses, increase CAP, therefore increase value of building), I would be willing to bet that 9 out of 10 times, sub-metering the water on a 4 unit or less in Cincinnati is a bad idea. In theory, yes, this sounds great. But in the real world, not so great.

Out of the 150+ units we manage in Cinci, not a single 4 family has the water sub-metered.  This is a fairly small sample size compared to the entire city of course, but I would be extremely surprised if I came across a 4 unit that has the water sub-metered.  

Therefore, all of your competing 4 units or less in the area are going to be advertising a rental rate that the property manager/landlord/market set based on the fact that the owner is paying for water.  You're going to have to drop your rent to offset this.  

Another reason is that there really isn't such a thing as CAP rate for 4 unit or less properties. Sure you can calculate this and utilize it in your search for rentals, but the bank isn't going to care whatsoever about your 4 unit CAP rate. On commercial buildings (5+ units), then this is a completely different story.

I tried very hard to figure out how to eliminate the water expense in my rentals and the ones we manage for our investor clients.  An average 4-fam water bill is going to run you around $1200-$1500/year and unfortunately this is just something I have to incorporate into all my 4-fam pre-purchase analysis.  

Your best bet is going to be installing high efficiency devices.  Check out the math below.

Here is a long drawn out example I sent to one of our clients who we recognized had 7 GPF toilets:

• On average, based on my research, I've found that a toilet gets flushed ~5 times per day. By doing this math, that is around 1,825 times per year. At 7 gallons per flush, with 8 units, that is about 102,200 gallons of water being used in your building just for the toilets!
• If we move to a high efficiency toilet in every unit, at 1.2 GPF, 8 units, that is 17,520 gallons per year.
• That is a water savings of 102,200 gallons - 17,520 gallons = 84,680 gallons per year.
• Looking at my personal water bills, it looks like 10 CCF is equal to 7,480 gallons, which is roughly how many gallons used in a duplex I own. That bill was $114 for the month.
• This shows we pay about $0.65/gallon of water used.
• If we actually were to save 84,680 gallons of water by replacing the toilets, that would save you ~$1,303 for the year. This is assuming each toilet has a 7 GPF rating. 
• Just for the toilets!