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The Pros and Cons of Including Utilities with Your Rentals

by Kevin Perk on March 17, 2014 · 41 comments

  
Should You be Including Utilities?

One of the many factors that must be analyzed when considering an investment property is the cost of utilities.  Usually, with every investment property there will be some utility costs associated with it.  Sometimes these costs may be minimal as, for example, they are with a single family rental. Other times, they may be significant such as they are with a 24 unit apartment building with a central boiler for heat and hot water.

As landlords, we want to maximize our cash flow.  Maximizing cash flow often means passing on those utility costs to the tenants who use them by including utility costs in with the rent.  But, should you include utilities with the rent?  The answer to that question will depend on many factors.  Here are some thoughts on the topic.

Related: Landlords: More Details on Transferring Utility Costs

Why Include Utilities

  • Your building is not separately metered.  I find this a lot in older buildings, especially those that were single-family houses that have been converted into multi-family units.  It is just cost prohibitive to retrofit and meter all of the units separately.
  • You don’t want the double hassle of sending out utility bills and then collecting the utility payments.  A utility reimbursement program which divides up utilities on square footage can really be a pain in the butt, especially when tenants complain that “they did not use that much heart, water, electricity, etc., etc.”
  • You can potentially make a little more money.  I have talked with landlords who include the utilities in the rent and charge a bit more for the service even if the units are separately metered.  Thus improving their cash flow.
  • You can’t charge a “per person” fee as this may be construed as discriminatory against larger families.

Why Not to Include Utilities

  • It makes your life easier.  If you can require your tenants to get utilities in their own name, you do not have to bill, collect payments or take the phone calls.  It just makes your life easier.
  • Your utility expenses will increase.  When utilities are included, there is no incentive for the tenant to conserve.  I have seen it time and time again where the tenant has the heat turned way up and the window open to cool it off.
  • You might get better quality tenants.  It has been our experience that those tenants who can get utilities placed in their names are simply better tenants.  They pay their bills and are generally more responsible.  Your local market may vary.
  • You spend less time dealing with the local utility.  Can be a real time and headache saver.

Related: Transferring Utility Costs – Opportunities and Challenges

While you can potentially make a little more money including utilities, their inclusion can be a real killer of your time and increase the level of stress in your life.  For me, personally, I am looking for more free time and less stress, so it is a no brainer for me.  I will rarely look at buying non-separately metered properties anymore.  Nor do I generally include utilities in the rent.  But that is just me.

Your market or your style may be different.  You may have to include utilities or it may be common practice to include them.  Either way that is one of the beautiful things about the real estate business, there is no one or right way to do it.  Let me know how it works where you are and if you do or do not include utilities and why with your comments.

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{ 41 comments… read them below or add one }

Adrian Tilley March 17, 2014 at 1:13 pm

Even if the units are not separately metered, there are companies, as discussed on recent podcasts, that will separate them out and take care of billing.

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Kevin Perk March 17, 2014 at 10:26 pm

Adrian,

Interesting, I will have to check that out. Can you point people to which podcast it was?

Thanks for reading and taking the time to comment,

Kevin

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Tom Sylvester March 18, 2014 at 4:56 am

Kevin – Podcast 60 with Serge – http://www.biggerpockets.com/renewsblog/2014/03/06/bp-podcast-060-serge-shukhat/

He discussed a local company that installed sub-meters on his water for a multi-unit.

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Sharon Tzib March 18, 2014 at 9:12 am
Steve March 17, 2014 at 1:17 pm

Kevin, Another good reason to include some of the utilities is the policy of the utility service provider. Some municipal providers will go after the owner and lien the property for unpaid utilities. In this case, it is a pretty good idea to include them in the rent, otherwise you may find yourself in a bad position if you happen to end up with a scammer in one of your properties. I had this happen with a SFR and was lucky enough to catch the unpaid utilities early when I suspected some issues with my tenant. I got the back utilities paid before our landlord/tenant relationship came to an unpleasant end, but I could have easily been stuck with several thousand in water and sewer bills alone if unchecked for the duration. I’m sure there are many horror stories like this out there.

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Kevin Perk March 17, 2014 at 10:28 pm

Steve,

We have similar issues here. The key is to document everything to be able to demonstrate to the utility company that you as the landlord were not responsible for the unpaid bills. That usually means taking leases and other documentation down to the utility company offices.

Thanks for reading and commenting,

Kevin

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Dawn Anastasi March 17, 2014 at 2:50 pm

If you have a service such as water that is lienable to the property owner, instead of the bill going directly to the tenant (and them ignoring and you not finding out unless you are monitoring the bills):

a) Have the bill go to you and pay the bill then remit to the tenant for payment within X days. Then the tenant knows you know when they have paid. If they don’t pay, they can be evicted if you put that as a condition into your lease.

b) If a bill comes quarterly, then have the tenant pay a set amount each month toward the bill. (Example: $150 average quarterly bill; have the tenant pay $50 each month). Then when the quarter comes up, have the tenant “settle up”.

c) Some utility providers include fixed amounts and variable amounts in their bills. You could include the fixed amounts as part of the rent, and just bill the tenants for the variable amounts.

There are many ways to structure such things to get a happy relationship with the tenant.

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Steve March 17, 2014 at 3:31 pm

Agree. My new policy on a few properties is to include water and sewer, with a cap on water. Beyond a certain usage threshold they will be billed. I never leave a utility open-ended in order to encourage responsible usage.

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Kevin Perk March 17, 2014 at 10:30 pm

Dawn,

Yes there are many ways to structure things. That is what is so great about real estate. Thanks for sharing your experience,

Kevin

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Tom Sylvester March 18, 2014 at 4:57 am

Dawn – We are looking at those options right now for our water.

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RoyN March 17, 2014 at 2:54 pm

Kevin:

You also need to know your market.

We decided early on that we were not going to rent with utilities included in the rent, but we still wanted to provide our tenants with a single payee option. We have several student rentals and first implemented this programme for our student tenants, many of whom cannot obtain a utility service without posting a substantial bond, due to lack of credit history {either due to age, or being from another country}.

We execute a separate agreement with the tenants which is included as a schedule to the standard lease. In this agreement we identify the utilities – and recently, services – to be included and set a monthly contribution which is paid in-advance at the start of the month (along with rent).

The utilities remain in our name and we pay the invoices when received. We also forward a copy of the invoice (electronically) along to the tenant, providing them with direct visibility of their utility usage.

Every three months (quarter), we reconcile the Tenant’s contributions against the actual cost of utilities consumed. If there is a surplus in the budget, we provide the Tenant with a choice of a) leaving the funds in the budget to be used against future bills (i.e. winter is approaching and electrical or gas costs will be increasing with heat); b) applying the surplus towards the next month’s rent; or c) refund the surplus to the tenant (this last option is only offered at the end of the lease when the tenant will be vacating). If there is a deficit in the utilities budget, we invoice the tenant for the outstanding amount which is due at the end of the month in which it is invoiced. We have only had a deficit twice – we have a very good handle on what utility usage for given property will run. The key to avoiding the deficit is setting the monthly contribution a little higher than the average monthly utilities costs.

This is not a reimbursement plan, so we are not chasing the tenant for utilities already consumed. Another advantage of this plan is it allows us to collect operational data on our properties {Canadian privacy laws prohibit the utilities from disclosing a tenants utility account information to us, even though we own the property}: this has been very useful to measure the real world impacts of the energy efficiency retrofits we have been carrying out on our properties.

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Kevin Perk March 17, 2014 at 10:32 pm

RoyN,

Sounds like a good way to work things in your market.

Thanks for sharing your experiences and for reading my posts. I do appreciate it,

Kevin

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Adam Schneider March 17, 2014 at 3:33 pm

I tend to travel the road with the fewest hassles when it comes to utilities. That almost always goes toward excluding utilities.

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Kevin Perk March 17, 2014 at 10:33 pm

Adam,

Me too.

Thanks for reading and commenting,

Kevin

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James March 17, 2014 at 4:29 pm

Well, for a different perspective- when I was a renter, I found it extremely appealing to have a landlord paying at least some of the utilities. Now, I am certain that all the landlords on here are honest and work hard to ensure that your homes are working at peak efficiency. But to be frank, I don;t know a one potential landlord from Adam, and I know there are plenty of slumlords out there who just don’t care unless it hits them in the pocket book.

At my last rental home, I found a very good landlord. He paid the water and natural gas (which provided heat and the cook stove) whereas I paid the power bill. Under this arrangement, we both worked to make sure that any air leaks, or other inefficiencies, were fixed. If my faucet was leaking, I called and got it fixed very quickly!

I can sympathize with tenets wasting utilities, but on the level, I think it is better if the landlord had some skin in the game. I have decided that when I start buying rental properties, I am going to cover some of the utilities. I am also going to watch usage like a hawk to catch utility wasting! (Ideas: Remote thermostat monitoring, doing regular drive-bys, ???)

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Kyle Hipp March 17, 2014 at 5:53 pm

James, if I have a tenant paying too much in utilties because of a leaky faucet or air leaks ect, I am feeling that in the pocket book. If th average utility bills for a given month are $175 but through energy efficient products and smart maintenance, I can get the average bill in my units down to $145 then I can charge $20/m more for rent and my tenant still comes out ahead as they are still saving $10/m over the competition and are living more comfortably with the energy efficient products.

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James March 18, 2014 at 9:16 am

Yeah- and how exactly do you prove to your prospective tenet that they are going to save $30 per month on their utilities in your unit versus someone else down the road that charges $20 less in rent?

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Kevin Perk March 18, 2014 at 10:01 pm

Only way I know would be to show the actual utility usage and Bills.

Kevin Perk March 17, 2014 at 10:36 pm

James,

I hear what you are saying. We do pay water and sewer here and try to insulate our old properties as well as we can, after all, we want them to pay the rent and their utility bills, not choose between one or the other.

Good luck with the monitoring, it is hard to be a policeman.

Thanks for reading and bringing in another perspective,

Kevin

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James March 18, 2014 at 9:21 am

It is hard- but isn’t monitoring what is going on at your rentals a fundamental key to success as a landlord? I have read countless BP posts that talk about the need to do drive-bys, know the neighbors, do regular inspections, etc. It sounds like I am going to be doing these things whether or not I am paying for the utilities. It adds one more thing to the list to check on, but it also gives me something else to use to get rid of irresponsible tenets if one sneaks past my screening process :)

We’ll see how it goes! I may change my mind after doing it a while!

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Sharon Tzib March 18, 2014 at 9:34 am

James, as a tenant yourself, how would you feel if your landlord was always driving by, checking in with the neighbors, and bugging you to do constant inspections? Besides, I don’t see how drive bys will tell you much about a tenant’s utility usage, besides maybe lights, but you’d have to be driving by A LOT in order to sense any sort of pattern, which leads me back to my first comment.

The best way to be efficient as a landlord is to properly screen tenants and have a solid lease. Normally if you do those two things, the rest will fall into place. As an out of state landlord, I don’t have the option of driving by, and frankly, I’m glad. Once a year inspections performed by my property manager provide all the peace of mind I need :)

James March 18, 2014 at 9:54 am

@Sharon (Sorry, BP comments don’t nest below 3 levels)

It would depend on the landlords attitude! I always enjoyed having him or the maintenance guy check in to see if I needed anything. At my last place, the landlord owned 3 properties right next to each other, so I saw him around fairly often. He would always say howdy and ask how things were going, ask me if I needed anything. He or a maintenance guy would come by quarterly and replace the filters and check the smoke alarm batteries. They always asked if there was anything needing repairs.

I always appreciated these visits. It made me feel like he was really on top of things and that he cared about his property- and my health and comfort. He had great attention to the little details that made the house comfortable.

Obviously, I would find it strange if the landlord was constantly going door to door and asking the neighbors about me! But if he introduced himself and gave them his card in case there was ever any trouble, I would not mind that.

Driving by, you can see things like if windows and doors are left open with the heating or cooling on, for example. Lights being left on is not a huge deal if you use energy efficient lighting. I am far more worried about heating and cooling expenses and leaking or running water. I plan to monitor power and water usage remotely, to catch leaks or other problems as quickly as possible. (With automated software, so it takes none of my time).

All of these things can be done by an effective and properly trained property manager.

NOW, obviously, this is only my theory- I am not yet a landlord, so I may find out just how foolish I am once I get my hands dirty!

Kevin Perk March 18, 2014 at 9:52 pm

James,

What you say is very true. We do drive by and check in but still trying to be a policeman will make you pull your hair out.

I like less stress so I just do not include them. Try your system though, if it works for you, that is great. There is no one way to do real estate.

Thanks for adding to the discussion, I do appreciate it and good luck,

Kevin

Tom Sylvester March 18, 2014 at 5:06 am

James – There is not a right answer, but a few bad tenants might make you change your mind, especially if you grow your portfolio. It’s takes time to “monitor like a hawk”, and the reason that many of us get into real estate investing to generate somewhat passive income and not have to spend a lot of time monitoring.

Also, we have had 2 tenants (right around the same time) had toilets that were constantly running and did not inform us because it did not impact them. Because water is billed every 3 months, we did not know until we received the water bills. One was $800 and the other was $600.

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James March 18, 2014 at 9:26 am

Wow! I have never been in an area that billed water every 3 months, so that would be a real bummer. I wonder how difficult it would be to install a water meter that could be read remotely, to keep tabs on water usage?

Like I said in a reply above- I think keeping an eye on things is necessary whether or not you pay for utilities. If you aren’t doing it yourself, you should probably have a property manger doing it for you. But like you said, there is no right or wrong way- whatever works in your situation!

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Tom Sylvester March 18, 2014 at 4:41 pm

James – It is definitely a possibility. I have only recently looked into sub meters for water, but obviously remote monitoring ones are going to cost more money. Everything is possible, it just depends on what make sense for your business.

I’d be interested in hearing your take after being a landlord for a few years. Although some people are great, there are also a lot of not great people out there. It doesn’t take many mistakes to be out thousands if not tens of thousands of dollars in this business.

Kevin Perk March 18, 2014 at 9:53 pm

What Tom said :)

Thanks for commenting Tom,

Kevin

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Mehran Kamari March 17, 2014 at 6:32 pm

Great article as it’s something that every landlord needs to consider about their product!

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Kevin Perk March 17, 2014 at 10:36 pm

Mehran,

Yes it is.

Thanks for reading and for the kind words,

Kevin

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Sara Cunningham March 18, 2014 at 3:28 am

Kevin very timely article for me. I have never included utilities in any of our rentals. However saying that I am in the process of closing on a property that has been converted into a triplex from a SFR. The water here is not separately metered. When I saw this it made me think about the deal a little bit. If I’m honest I really still don’t like the idea but the numbers look so good on paper that the positives outweigh the negatives on this deal. If it came down to having a choice though I wouldn’t do it. When we were younger we lived in housing that included utilities and if I am totally honest we didn’t think about being conservative since we weren’t paying, so I tend to assume that everyone else will exhibit the same kind of mentality.

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Kevin Perk March 18, 2014 at 9:57 pm

Sara,

It is typical here for there to only be one water meter and thus typical in our market for the landlord to pay the water bill. Water is cheap here so it is not a deal killer. We just budget it into our analysis when looking at a property. Since we are billed monthly we can generally find out pretty quick if there is any leaks. Don’t run away run a good deal because of a little water. :)

The bad part these days is all the stuff they now tack on to a utility bill (which we get due to water). We also get billed for sewer, storm water, mosquito control and street lights. I see this fee trend only going up in the future.

Thanks for reading and commenting,

Kevin

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Sara Cunningham March 19, 2014 at 2:24 am

You are right Kevin. When I got a copy of the last water bill it wasn’t the usage of the water but all the add ons like sewer, trash pick up etc. It isn’t going to scare me off, I just got the inspection reports back and it still makes sense from a monetary point if view. We will close the deal next Tuesday.

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Kevin Perk March 19, 2014 at 10:09 pm

Wonderful! Congrats!

Lets us know how it goes,

Kevin

Sharon Tzib March 18, 2014 at 9:15 am

Well if my units were separately metered, I would never bother with any of this. I would just let them pay their own utilities. However, since I’m looking at apartment investing, it seems you almost never find water separately metered, so some of these tips are quite handy. I like the idea of the RUBS system a lot, or how Roy does it too. Very helpful article and interesting subject, Kevin!

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Kevin Perk March 18, 2014 at 9:59 pm

Sharon,

Thanks for the kind words.

It must depend on your market, because most of my apartments are separately metered for electricity and gas.

I appreciate your comments as well,

Kevin

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Sharon Tzib March 20, 2014 at 8:08 am

Yes, Kevin, as I said in my comment, I’m talking about water primarily. Thanks!

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john March 19, 2014 at 4:02 pm

When I had Section 8 properties, I included them. I did not want utilities to be cut off because the tenants did not pay,

Responsible tenants can pay their bills, and do. Get better tenants, get better profit.

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Kevin Perk March 19, 2014 at 10:11 pm

John,

Probably a wise move on your part with the Section 8, although I have no experience there.

Totally agree with your last point. Screening is key. Better tenants equals less headaches and more profits.

Thanks for reading and taking the time to comment,

Kevin

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Kevin Perk March 19, 2014 at 10:13 pm

Just wanted to thank everyone for the great discussion here. I know all of the readers appreciate it. Keep it up!

Kevin

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Abel Vazquez March 24, 2014 at 7:10 am

Great article and plently of interesting points you mentioned. Well it seems like here in California you can offload the expense of utilities to the tenants at least it seems that way because the majority of the rentals I’ve seen do it and if the landlord doesn’t include all the utilities the usually include the ones who usually are more expensive. I will certainly be looking only at properties which are separately metered it sounds like it would save you a bundle of time. Well awesome article again thank you Kevin.

Abel

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Kevin Perk March 25, 2014 at 10:53 pm

Abel,

Thank you! Happy investing!

Kevin

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