Triplex - inheriting tenants who haven't been paying utilities?

Question

Morning everyone!

My partner and I were just accepted on a triplex in Tacoma, Wa pending walk-through and inspection. We did the walk through yesterday and it's in decent shape - hooray! Here comes the but: The place is only metered with 1 meter though and in Tacoma (unlike any place where I've ever rented) the owner is responsible for paying (and having in their name) the utilities (W/S/G + gas). The tenants put electric in their name.

We are inheriting tenants (fun!) Some more facts:

- Their current rents are slightly below market

- They are all currently Month-to-Month tenants

- Adding separate meters would be about $4-5k/piece - not in the plan for us at the moment.

Our plan is to issue the tenants 3 choices and give them a month to decide which they'd like to do:

1) sign a 12-mo lease with a modest/small rent increase + an additional $150/mo for utilities

2) continue on a MTM lease with a higher MTM fee + an additional $150/mo for utilities

3) move out

Obviously we'd like them to go to options 1 or 3 as keeping them on MTM increases our chances of vacancies and it is traditionally harder to rent in the winter months. Option 3 allows us to go in and do some light cosmetic repairs, shine them up a bit and get it back on the market for higher rents.

When we run the numbers as is everything looks great until we factor in eating the cost of those utilities - which in Tacoma is not cheap. We're still cash positive, but it's barely $100. When we run the numbers with the hypothetical increased rents + utility payments we walk with ~$800/mo. Hooray! This budget includes $200/mo towards CapX (roof will eventually need to be done) and a healthy $250/mo towards repairs/landscaping and anything else that comes up right away.

So I guess my questions are: does this sound reasonable to everyone? Has anyone ever done this "flat rate towards utilities" to tenants and how do they react? Mostly it feels like it's about about optics - and Option 1 (with the small rent increase + a small utility fee is easier to swallow than here's a $400 rent increase.

I find it nuts that the last owner was eating all of those utility costs - but as I've learned everyone's finances are different and maybe he owned the house/didn't have a mortgage. Thanks for your thoughts and comments. Bonus points for you if you have any hot tips on inheriting tenants - the last time we did that it didn't go so well.

Thank you.

David Sweeney · Answer

Here is a link to a past BP discussion on RUBS which may be of interest to you. Here is another article from the AAOA that has some good information on maximizing your profits with RUBS. It also has a sample letter you can send to tenants when they sign a new lease.

M.C. Nachtigal · Answer

Could you just say each unit is responsible for 1/3 the cost of the utilities, due with the following month's rent? I'm surprised you have to have gas in your name. In Seattle W/S/G has to be in property owner's name, but not electric or gas.

Aaron Nelson · Answer

My wife and I charge a flat rate for utilities. We write into into the lease and make is due as rent the first of each month.

David Sweeney · Answer

Sorry, not a sample letter but a sample lease.

Mike Wood · Answer

@Christen G. You are lumping water/sewage with gas. I would consider these separately. I assume that the gas is being used for heating and hot water. Since each tenant already has electricity, have you considered changing the heating to electric, so the tenants are responsible? My guess is that even the water heaters can be added to each tenant electrical system. This will elevate some of the variables.You will have to buy and install the new electric heating, but once it done, you wont have to worry about how much heating your tenants use.It is unlikely that you can separate the water service very easy, likely alot of the estimated costs of installing the extra meters (assuming you do not have large impact fees associated with new meters). But the cost of water should be something the remains fairly constant and you can budget for and include in your rent price.

Jennifer T. · Answer

Assuming that all works out to be "par for the course" in that area, I think it sounds quite reasonable. It's nice you're giving them choices so they can choose the best option for themselves. Though I doubt they will appreciate having choices. People tend to look at the negative of "my awesome deal is ending". Instead of the positive of "look at all the money I saved for so long, but the new terms are still fair".

Deanna McCormick · Answer

whats the market like for similar units.. that will tell you if your rent amount will hold up.Owners typically pay heat , water, sewer, trash in most multi family buildings and this is part of the formula in factoring the rent. Check similar rentals and see what they include for same size unit as yours.. and you'll know how you stack up.As far as putting in separate meters the cost would hard to recoup.