What to do if the utilities cannot be separated?

Question

Hello everyone!

My partner and I recently purchased a 3-family rental property. The first floor of the property used to be occupied by the owner, and the other two units were rented. We will be renting out all 3 units.

There is an underground oil tank that is currently used for heating and hot water. We will be taking the tank out and switching over to gas, but it will cost an exuberant amount to separate all the utilities so we have no choice but to leave the heating and hot water on the owner's (our) meeter. The plan is to put in a Nest, or similar, thermostat in the whole way (under a lock and key) so to be able to control the temperature from wherever.

As we cannot breakout the hot water/heat to each unit, would anyone have any suggestions as to how we can pass on this cost to the tenant? Building the cost into the rent is one way, any other suggestions?? Anyone dealt with this before?

Would be grateful for any advice! Thank you!!

Nathan Gesner · Answer

It's actually not that hard but this is a common question.

1. Get an average utility use for the past year. It's not 100% accurate but it will be pretty close.

2. Divide the average by the # of units and anticipated share of use. For example, let's say you have a 2bed/1bath unit with washer, dryer, and dishwasher and the other two units are 1bed/1bath with no washer, dryer, or dishwasher. The larger unit with more appliances will use a larger portion of the utilities so they should pay more. You may split it 50% to the large unit and 25% to each small unit or maybe 40/30/30.

3. Once you figure out what percentage each unit is responsible for, divide the utility bill according to that split. If the average bill is $300 and you are using a 40/30/30 split, the charge would be $120/$90/$90.

4. Add the utility amount to the rent and market the units as "utilities included"

Consider increasing each unit's share by 10 - 15% to cover excess use. Tenants tend to use more when they don't pay the bill directly. In this example, I would increase to $135/$100/$100 which gives you an extra $35 (about 12%).

I would also consider setting a "ceiling" to what is included so any excess use would be split and passed on to the tenants (or passed to the responsible tenant, if you can identify them). For example, you could set a ceiling of $400 for any one bill. If the bill suddenly shoots up to $500 for that month, you could find out who is responsible and pass the extra $100 on to him. If you can't find the responsible party, you split the $100 among the three tenants using the formula created prior to occupancy.

Whatever you decide, make sure it is spelled out clearly in the lease and explained verbally in advance.

Helen M Leyzerovich · Answer

This forum is incredible! Thank you so much everyone for so much in-depth advice. I was starting to fret a bit about this whole thing, but it really seems to be not a big deal at all. And for Account Closed it even turned out to be most profitable!

Happy New Year to you all and wishing you many good deals in 2020!!

Mike McCarthy · Answer

@Helen M Leyzerovich have you explored other options? I installed 3 mini-split units for heat &AC in a 3 family. It was expensive up front, but now that the tenants are paying for their own hvac, it’s been worth it. Plus a lot of the cost was offset since I would have needed to replace the old boiler anyway.

I’m many states you can also include utilities extra from your rent. So you rent for $1000/mo plus $100 utilities. I try to state it like that I’m my advertisements - I am totally upfront about it, but an $1100 rent might exclude some prospective tenants - even though they are paying utilities either way. But check your state laws. Some states don’t allow charging for utilities unless they are separately metered. (NJ for one)

Wesley W. · Answer

@Helen M Leyzerovich

As usual, @Nathan G. has given you very thorough and sound advice.  Your concern regarding changing fuels could be addressed as follows.  Get the building's historical use of heating oil (in gallons).

Internet research how many therms of energy each gallon of heating oil provides; do the same for the units of gas (cubic feet or something).  Convert your building's therm use back into units for natural gas.  Now, you'll know how much gas your building would use, based on historical usage of oil.  Your utility provider should be able to estimate a monthly bill for you if you provide the monthly gas use (your calculation divided by 12).  This estimate from the provider should include the fixed costs including monthly connection charges, taxes, etc.  Finally, use Nathan's proportion to estimate the rent increase (including the "overage" cushion he suggests) above market for each unit.

It's a bit of work, but not unwieldy, and it will give you a closer approximation than a total guess that will need to be adjusted in the first few years of service.

Account Closed · Answer

I have a duplex with a similar situation (water, gas, and electricity all have one service and not able to be split). I estimated what the average utilities for the year and added it into the rent plus a little cushion. In all honesty, this property has been one of my most profitable. I have found that tenants LOVE to only think about making one monthly payment instead of numerous. They also like to have a flat amount to be able to budget better and not worry about cold WI winter heating bills!

Helen M Leyzerovich · Answer

@Brian Roberts lesson learned on this one for certain! Unfortunately, the oil company that was servicing the house in the past is old school, doesn’t seem to keep any records and provides handwritten notes for receipts. So, no history to speak of. Next time, we’ll definitely pay much closer attention! Happy New Year!!

Brian Roberts · Answer

@Helen M Leyzerovich Nathan G spelled out pretty much exactly how I deal with my older property with combined utilities.  One thing to consider in the future would be to ask for the statements for the last few years for the utilities as a stipulation in your offer when purchasing.  I like to do that as many of the multi unit properties in my area are old hoses that are split.(all combined utilities) By doing that you can verify some of the numbers that sellers like to use as selling points. Sometimes they are accurate,  often times they arent.

Syed H. · Answer

Don’t spend the money on splitting the utilities. It costs too much money and brings u 0 value. I charge a flat $80-100 for heating. Heating actually only costs me $50-$70/month.

Mike McCarthy · Answer

@Helen M Leyzerovich that is my understanding - but I don’t rent in NJ, so I’m not 100% familiar. They may allow to charge a specific amount ($50/mo), but not estimate  or split it based on usage. Definitely look into it though.

What to do if the utilities cannot be separated?

Most Popular Reply