Demystifying Utility Expenses in Real Estate: A Practical Guide

Greetings, fellow real estate enthusiasts! Today, we will delve into a topic that's a cornerstone of successful real estate investing--utility expenses. While utilities might not sound like the most interesting thing in the world, they wield immense power over your investment's bottom line. If you're just dipping your toes into real estate, you might think utilities are just water, gas, and electricity, right? But the reality is far more intricate. Ignoring these intricacies could lead to costly blunders. So, let's roll up our sleeves and dissect the utility essentials in a manner that leaves no room for confusion.

Picture your ideal dwelling. It requires a dependable water supply, an effective sewage system, hot water on demand, a stable electricity connection, and of course, a cozy heating arrangement, especially during the chilly months. However, don't be deceived by the apparent simplicity. The true complexity emerges when you're dealing with multi-unit properties and the need to allocate utility costs fairly among tenants.

Water, the elixir of life, takes center stage. It could flow from a public source, be drawn from a well, sourced from a spring, or even be part of a community arrangement. Regardless of its origin, water enters your property through a primary water line linked to a meter. Here's the catch--each unit requires its own water meter in order to fairly charge tenants for water. In scenarios where this isn't feasible, the Ratio Utility Billing System (RUBS) is a potential solution.

Well water pump

Now, let's consider where all that water disappears to. The sewage puzzle interlocks with the water puzzle, especially when costs are distributed through meters or RUBS.
Just as there are various sources for water, there are various methods of disposing that water. Most commonly, sewage exits the property through a main sewer line connected to the public sewer system--your local municipality is responsible for providing the bill. Another relatively common sewer system is septic. This system is completely bound to the property. The waste is stored, treated, and released all within the confines of your individual property. Replacing one of these systems will definitely cost a pretty penny so make sure you do some further research if you encounter one of these.

Septic system diagram

Ah, the joy of a steaming hot shower. There are two different types of hot water heaters: tank and tankless, fueled by electricity, gas, or oil. It is essential to have one water heater per unit or else you will be stuck with paying the bill. 

Electric hot water heater - with tank

The next item is electricity, the lifeblood of modern living. Without going into too much detail, here's a quick electric overview: Electricity enters your home through a main line through overhead cables or from underground. It flows through the electric meter outside and then into the main panel on the inside. Again, for multi-unit properties, it is essential to have one meter and one panel for each unit. Another thing to be aware of is the amperage of each panel. The main electric box for each unit will say the amount of amps the system can handle at once. Usually, it is 100, 150, or 200. If you have electric heat, electric hot water, and an electric stove, it is unlikely that 100 amps will suffice. 

100 amp panel

Even if you live in sunny Florida, there are going to be be some chilly days where you'll be thankful for your home's heating system. There are three main ways to heat one's home. The first is forced hot air, which utilizes ducts and vents to circulate heat throughout a home. The heat is generated in a furnace or a heat pump which is typically electric or gas powered. The second way to heat a home is with a boiler. Boilers send hot water through pipes to baseboards and radiators throughout a home which then heats the air around them. Last is electric baseboard heaters, which work similar to boilers, except the baseboards are heated with electric coils rather than hot water. Once again, it is essential to have separated utilities and gas meters in order to avoid paying for heat. Noticing a theme about how to reduce your utility expenses as a property owner? Yes, separating utilities allows residents to pay for their energy consumption and reduce your out-of-pocket expenses for utilities. 

Gas-powered boiler Inside of a hydronic baseboard heater Electric furnace

Whether you are a first time investor or a seasoned home-buyer, having a nuanced understanding of utility systems will not only help you save money, but also will act as a safeguard against the perils of uninformed decisions.