Is there a way I can still charge utilities to the tenants on the second floor?

Lenders may have greater responsibility imposed on them for the amount their partners charge.

I know it is a much more profitable way to go, as the private lenders do not charge as many points as a HML, if any and maybe the closing costs are a little cheaper.  

I am currently charging him $1400 per month which covers the mortgage and taxes, but that is about it.

However, I did have "that one" who charged me $500, then didn't follow-thru on his contract.

They all charged me by the hour.

So you can still charge for water and make sure it gets paid each quarter.

We have also been running a business for 6 years.In other words, we did not just charge in like a bull in a china shop without understanding REI but we did not spend a bunch of time on the sidelines wondering if we should move forward with this.You sound like you have a good head on your shoulders.  

@Collin Tilbe in addition to monthly percentage some managers charge a turnover fee (when tenants change) of up to one months rent.

Cash is what matters.If you do manage the property (most states require you have a real estate license to manage properties you don't personally own) then you would be entitled to the property managers charges.