Paying utilities on a Multi-Family and it's eating all of my cash flow. (Iowa)

[Lincoln Waite]

New investor here. My first property was a multi-family in Iowa. I got it for dirt cheap, and now I see why. The former owner (LLC) was rather lacking on upkeep of the units. And now after a year, the utilities are eating up my income. We're talking negative cash flow, and it's fustrating.

Quick overview, 3 units. one is a 2 bed/ 1 bath, another is a 1 bed/ 1 bath, and the last is an efficency. This is a converted single family, so all of the utilities are together. 

Here's the numbers- I'm making $1,700 on rent, and in January I'm paying $1,113 in utilities. Help!

Thank you in advance!

[Nathan Gesner]

Quote from @Lincoln Waite:

I'm certain you are not charging enough for rent. I just searched and the cheapest 2bed/1bath I can find in Cedar Rapids is $700 a month without utilities included. 

Your property:

2bed/1bath: $700

1bed/1bath: $550

Efficiency: $400

That's $1,650  a month, not $1,100. I don't know enough about your rentals to determine quality, location, or layout, but I suspect my numbers are pretty close.

However, your utilities are pretty expensive in the winter. If renters find out your utility costs are high, they will expect a lower rent to balance it out. I would keep rent a little below market, then split the monthly bill between the tenants on top of rent.

Old houses in cold climates get expensive in the winter. You may pay $500 in the summer and $1000 in the winter. You can fix this by talking to the utility provider about creating "equal billing" or whatever they call it in your area. They will take the average of the last 12 months, then charge you the same amount each month. Each year they adjust it up or down based on actual usage of the previous year.

Let's say you get an average of $600/month. You can create a formula for splitting that cost among the tenants. Read my Utilities 101 below to see some options. Here's an example.

There are many ways to skin this cat. The key is for you to separate the utility costs from the rent, then advertise your units with the rent rate only and explain the utilities later.

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.