All Utilities Included, Should I Do It ???

Question

Looking for some advice about offering all utilities included at my rental property. I'm trying to find alternative ways to increase monthly rent and had the following idea. Please keep in mind that I have 2 years of historical data/cost for each respective utility service.

I want to look at the historical data for the past two years and come up with monthly averages for each utility service (water, electricity, gas). I would then add all the numbers up and add margin to the final amount. For example ... suppose the average over the last 2 years (water, electricity, gas) has been $230/month. I would then add 15% margin to that amount and come up with the following ... $230/.85 = $270/month. This $270 would then be added to the base rental amount.

1. Is 15% margin a solid number for this or should I be asking for more? The past two years of data was for a 2 person household when I lived in the home with my wife. I could limit the property to 5 people (3bed/2.5 bath) max occupancy but I want to make certain I'm capturing enough margin to cover for the potential of additional people (2 people data vs. 5 people max). I also want to capture enough margin to cover for people running up the respective utility bills because they aren't paying for it.

Any advice would be appreciated. Thanks.

Dennis M. · Answer

that’s a great alternative  way to lose money not gain it . All those calculations go right out the window when the tenant realizes they can use as much heat electricity and water as they want or need .You’ll  tear up your spreadsheets and calculation papers when you show up at your property in the dead of winter and your tenants have the windows wide open with the heat on 80

Mike Cumbie · Answer

@Dennis M.

Isn't wrong.

Plus every Band/cheerleader/Boy Scout group will end up doing car wash fund raisers at your place because "We don't pay for water, just do it at my house"

Mike S. · Answer

This reminds me of the owl and the tootsie pop, how many licks to get to the center of the pop? The world may never know.  How many vacant months will it take to place a tenant with upfront electric priced in?  I'm afraid we'll never know that either.

Kenny Lincoln · Answer

Great feedback everyone ...

More ideas are rolling in ... instead of adding 15% margin I would like to shoot for 30%. I'm thinking of the following but this might get too complicated.

See 4 person household example below.

Base Rental Amount = $2200/month

Average Utilities = $230/month (2 year data w/ 2 person household)

1. Add 30% margin to average utility cost

2. Include the following in the lease

a. Each additional person (after 2) will add $75/month for utilities. In this example we have a 4 person household.

b. Monthly Rental = $2650 (This is actually the average utilities from past 2 years divided by .7 + base amount + $150 for 2 additional people. Round down to $2650)

c. Tenant will be responsible for utilities in excess of $478 per month (230 divided by .7 + 150).

d. Landlord will rebate tenant utilities in excess of actual monthly total.

e. Landlord will provide tenant with a check at the end of lease for the excess amount.

f. Tenant has the option of rolling the excess into a new lease

A colleague of mine mentioned that I could give the tenant a rebate if I want to keep them. Offering a rebate of any excess at the end of the lease may influence the tenant to roll the rebate into a new lease.

This is just another idea and again I understand this may get too complicated.

Nathan Gesner · Answer

I agree and disagree. Yes, most tenants will use more utility when they know it's included in the rent. However, you can mitigate that with proper planning. Some ideas:

1. Include utilities up to $270.00 a month. Anything over that is charged to the tenant.

2. Set your rate based on an occupancy of two people. Charge $50 - $100 for each additional person due to the increased utility use. One extra person doesn't normally eat up another $100 in utility use so this increases your profit margin.

3. Your lease should include a clause that the utility use will be reviewed every 6 months and may increase based on actual consumption.

Find out what it costs for tenants to set up utilities. In my area, they have to apply and then pay up to $400 for a deposit. The tenant will see it as a benefit if they just pay one price and no utility deposit.

Kenny Lincoln · Answer

Thanks to everyone for the advice. Someone also mentioned to me that imagine the tenant doesn't pay rent for whatever reason and then I'm out the mortgage payment and the utilities.

It was also recommended that I could cap the utilities. Example ... tell the tenant I pay for the first $270 of utilities but they have to cover anything additional. I think this would get sticky/tricky.

I could always increase the margin but then risk pricing myself out of the market. This might also further incentivize tenants to leave windows open as mentioned above. I can hear it now ... "I'm paying $2600/month for this place and I'm going to get my money's worth.

Bob Okenwa · Answer

@Kenny Lincoln

This is something you should probably not consider. I can offer advice from my own personal experience. I once rented an apartment with all utilities included. I live in the desert so AC is a must. My roommates and I would literally leave all of the lights and AC 24 hours a day, even when the apartment was empty simply because the bill was not our responsibility.

It's a good way to keep tenants and reduce turnover, but the costs saved from turnover reduction are eviscerated by the albatross of utility bills you will be paying year-round.

Kenny Lincoln · Answer

Thanks Dennis, I'm fearful of that as well. It seems like you have a story or two about offering all utilities included.

All Utilities Included, Should I Do It ???

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