How would you manage utilities in a 2 unit with no separate meters?

Question

I am closing a deal on a SFH that has an attached ADU. I am not sure yet but I am thinking LTR for the main portion and perhaps MTR/STR for the ADU. It is not separately metered and right now I don't see adding a meter as an option (cost/not zoned for MF). It seems leaving the utilities in my name and charging tenants on top of the rent is the easiest, but not the most passive. The home has gas utilities but I plan to replace gas fixtures with electric. How would you manage water/electric utilities in a 2-unit with no separate meters?

Paw Nouri · Answer

We always have to ask ourselves what are the incentives that we’re presenting to tenants and people in general. When you include utilities in the rent, you incentivize them to be wasteful. e.g. leave water running or leave AC on. It’s human nature. I’d recommend talking to an electrician. If you’re local to the home, then there’s a device you can attach to before the meter and you can measure electrical usage. Water since it is cheaper cost can be included, same goes with gas

Jeremy Medina · Answer

Thank you all so much for your responses, I truly appreciate the insight of people who have been doing this as I start my REI journey. It's tough to say what I will do for sure, but these were all extremely helpful in helping me decide.

Nathan Gesner · Answer

HOW TO SHARE UTILITIES 101

You have a property with two or more units and the utility meters are shared. There are a few options.

1. Pay to separately meter the utility. This can be very expensive and is usually the worst choice because you can't justify the cost.

2. Charge the tenants a higher rent rate and include utilities with their rent. This is the simplest method, but it also means your tenants are more likely to abuse the utilities by leaving windows open with the heat or A/C running, leaving lights on, ignoring the toilet that constantly flushes on its own, etc.

3. Pay the bill yourself, then reimburse yourself by charging the tenants based on a formula. This takes a little more work, but it's the fairest and reduces the likelihood of tenants that squander utilities.

If you choose #2 or #3, there are considerations:

Start with an average. Use varies throughout the year. Heating costs go up in winter, as does electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a historical average based on the last year of use. It won't be 100% accurate, but it will be close enough. I recommend you do this annually to adjust for utility increases and other variables. If your average heating bill is $150, you may not collect enough in the winter months when the bill reaches $225 but you'll collect extra in the summer when it drops to $65. If you base your tenant charges on the historical average, you should come very close to collecting the entire amount over a one-year period.

Charge a higher rate. If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility. If the bill is $100 a month split between four units, increase it to $120 and charge each tenant $30.

How to calculate charges. Don't make it more complicated than it has to be. If you have four 2-bed/1-bath units with the same appliances, split it four ways and call it a day. You can make minor adjustments based on the type of appliances (dishwasher, clothes washer and dryer, air conditioning, etc.) and the size of the rental. If Apartment A is a 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath with no washer/dryer, Apartment A should pay a higher rate. Another option is to split the cost based on the number of occupants in each unit but this also means you'll need to adjust the charges as tenants move in/out, so it requires more work and I wouldn't recommend it. I recommend a simple spreadsheet to check your math and it will make it simple to adjust each year.

End the complaints. Tenants may complain about your method of calculating how much each unit pays. They think it's unfair because they only shower once a week but can hear the upstairs neighbor showering twice daily. You can end this by showing them an actual utility bill. Why? Because a large percentage of the charges are base fees that do not change based on use!

I just looked at a utility bill with a total charge of $184.12 but $116.50 is from base fees! If I divide this bill by four units, each tenant would pay $46.03. If they were separately metered, each tenant would pay the $116.50 base fees and their individual use, which would be 3x higher than what they pay when sharing a meter.

There are many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.

Dan H. · Answer

First I suggest you find out what is allowed in your jurisdiction.  My jurisdiction has reasonable rules that I cannot charge more than the utilities cost and algorithm is to be fairish.

All my MF share water meter.  Water in this market is very expensive.  At move in they are told what percentage of the water they will be charged.  I created an excel sheet that the water bills get entered and it automatically calculated automatically for each unit.   The amount they owe on water is texted to each primary tenant.  This is easily assigned to a PA.

Occasionally a tenant complains about their water fee.  I tell them 1) water is expensive 2) sharing of one meter reduces the bill over individual meters 3) they agreed to it when they rented the unit and it is in the lease 4) if they do not like it they can move elsewhere at the end of the lease.  I virtually never get a 2nd complaint but if I do they ar3 not a preferred tenant and their rent increase reflects this.  They can take the hint and move somewhere else where maybe they will be satisfied with the utility billing.

Good luck

David Bennett · Answer

Several methods come to mind for the ADU.   1) a regular or periodically adjusted flat fee (based on an estimated usage);  2) factored into the rent (essentially the same as a flat fee); 3) percentage proportionally based on sqft.  In any case you could base it upon the actual bill, or like the utilities do, based upon past usage, but at the current rate.

How would you manage utilities in a 2 unit with no separate meters?

Most Popular Reply