Pay to split water meter? Or Surcharge tenants?

Question

Analyzing some deals on ways to increase cash flow on multi-family properties...

One of such deals is a 5-plex, with one water meter. Current landlord pays about $60/unit/month on water, sewer and garbage. That's $300/month that could be cash flow. I would like to change that. I have two options...technically 3;

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A- Continue to pay $300/month (not really an option, lol)?

B- Pay ($3-4k) to split the water meters, and transfer the (water-sewer-garbage) bill, plus deposit to each tenant?

C- Surcharge the tenants $60/month. and absorb the occasional overage. But, pay $0 upfront to split the meters?

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B or C?

As the new landlord, what would you do? Which received better by the tenants?

As a tenant, which would you rather? Keep in mind that option B also comes with a deposit to the utility company

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Thanks,

Chinedu

Milton Rivera · Answer

@Chinedu Akunne

I would target option B.  A five-plex is technically commercial property (anything over four units is) and should be evaluated via cap rates.  Cap rates being determined by total Net Operating Income, by lowering your expenses you, in essence, increase your NOI, therefore increasing the value of the property.

I can appreciate you being mindful of how the tenants will handle it, but in the long-term is your decision.  I believe the key element here is how you communicate it to the tenants.  You can give them a 60-90 day notice that this is going to happen and remind them every time rent is collected.  Keep them informed when the contractors will be out and how they should go about setting up their accounts with the utility providers.  Re-iterate this is a fair process and that now they will only pay for what they actually use.

Good luck,

Milton Rivera · Answer

@Chinedu Akunne

Overall, I would still do the same in a quad.  You are transferring the risk to the tenant and hold them accountable for their on utility consumption.  You may also want to consider what are other apartments are doing in the area.  Any new construction is going to be metered unless it is a 55+ community where tenants want convenience.

I would not necessarily provide a credit.  Consider doing the work when you may have one or two units vacant so that you make it part of the turnover process and possibly inconvenience fewer tenants.   The more notice/time they have, the more time they have to get ready for the event and cannot claim it as a surprise.  If you have an average credit score most utility companies do not require a deposit.

Thomas S. · Answer

My preference would always be option D, not buy the property.

Assuming you are adding value my second choice would be to install the separate meters. You will need to confirm with your state regulations as to whether you will need to wait till the end of a tenants lease to change billings or require they put utilities in their name. You can not usually change anything during the term of a existing lease. Hopefully they are all on M2M.

Chinedu Akunne · Answer

I did man! It went really well. It increased cashflow, without increasing rents. Although, I almost wish I didn't do it, because I'm converting them all to short term rentals. And I'm back to paying all the bills (water including).

The good thing is, if I ever sell, it would be a great selling point to future investors.

Lamontis Gardner · Answer

Hey, did you ever split the meters? If so, how did it go and how did your tenants respond to it?

Chinedu Akunne · Answer

Thanks a lot, James! I'm definitely doing it! Starting the process middle of March, to avoid the "winter drought", in case tenants decide to move

Chinedu Akunne · Answer

Wow! Never considered that. Thanks! But, hmmm...

How do you then pass the cost along, if they expect it to be included? Also, won't it be more efficient for the utility company to handle that; passing that liability/headache to them as well?

Jill F. · Answer

In my market, it would be hard to charge water on a 5-unit. Tenants here in those types of properties expect water,sewer,trash to be included. I am installing sub-meters with remote readers from flows.com for my duplexes where it is possible to pass along water and trash costs. The meters + readers cost about 170.00 and my plumber charges 150 for the install. My handy man reads the meters every month. There is an option for a gateway system that can upload data from up to 32 units to the internet for about $1000 with a 50/year data fee. I'll probably eventually go that route. The guys at flows.com were VERY helpful in going over my options (I have no affiliation with the company other than as a customer).

Chinedu Akunne · Answer

Haha! I'm with you. I would not want to find out either.

I do like the idea, and may be able to do a hybrid of your option (we'll call it option E), and option B.

Thanks a lot, Mike!

Pay to split water meter? Or Surcharge tenants?

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