Landlording & Rental Properties

8 Pros & Cons of Including Utilities With Rent for Your Investment Properties

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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 they may be with a single family rental. Other times, they may be significant, such as with a 24-unit apartment building with a central boiler for heat and hot water.

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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 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.

hvac-inspect

Related: The Not-So-Obvious Problem with Billing Back Utilities to Tenants

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 multifamily units. It is simply 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 that divides up utilities on square footage can really be a pain, especially when tenants complain that “they did not use that much heat/water/electricity,” 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. This can improve their cash flow.
  • You can’t charge a “per person” fee, as this may be construed as discriminatory against larger families.

smart-thermostat

Related: Why Landlords Should Reallocate Utilities to Improve Net Income

Why Not 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. This can be a real time and headache saver.

While you can potentially make a little more money including utilities, their inclusion can be a real killer of your time and can 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. 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.

We are republishing this article to help out our newer readers.

Do you include utility costs with the rent? Why or why not?

Let me know what works for you with a comment.

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in ...
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    Fritzala
    Replied about 2 years ago
    Can a landlord legally make a profit on the utility, charging the tenant a flat fee which is double the actual cost?
    Stephen Shelton from Debary, Florida
    Replied about 2 years ago
    Sharing utilities seems to bring out the truth of human nature that causes socialism to fail. People will always want the maximum result with the minimal effort so taking on the responsibility of maintaining a shared utility system is bound to cause people to be wasteful at the landlord’s expense. My newest rental has just hit Year 2 and the tenants shuffled a bit where one left and the other brought in his girlfriend. One of the big problems she mentioned was the shared water where the landlord split the water bill among thedifferent tenants and she felt she was always getting hit with the costs of her wasteful neighbors.
    Kristina Lobrin
    Replied about 2 years ago
    Great article as it’s something that every landlord needs to consider about their product! Great discussion here.
    Howard Sklar Investor from Aurora, Colorado
    Replied about 2 years ago
    The deciding factor for us has always been (given our low-income / “bread & butter” tenant profile) what our competition is doing and certainly not to put ourselves at a competitive dis-advantage. Our neighborhood has “bitten the bulet” and been paying utilities for so long that passing such costs along would entail a genuine paradigm shift. How to make that happen for the neighborhood……not that’s a real question!!
    Matthew Moreau from Tampa, Florida
    Replied about 2 years ago
    I’m currently dealing with utility mangement on a 8 plex we just purchased. Luckily, the gas/electric is individually metered. However, the water is split between 2 blogs. 1 meter for every 4 units. Problem is the utility room is a plumbing nightmare with hot water heaters and individual boilers p/unit closely confined in a small space. I recieved an estimate of $2.5K-$3k to re-work plmbg & install meters! I’m attempting RUBs route now. Idk if it will be easier in the long run or not. Maybe once the tenants are acostumed to paying it but the first month was challenging with most tenants outstanidng balances. Sub-metering is unfortunately not a option for me. With that said, which have been better for other investors RUBs vs. including it in the rent?
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 2 years ago
    The 2 biggest problems I have with including utilities are, 1) tenants will usually underestimate how much they pay in utilities and thereby feel like the rent price is too high. They don’t really compare like-to-like when it comes to one unit with utilities and another without. 2) The risk that a tenant will just really bleed you since they aren’t paying for it. It could just be because they need the heat at 85 when it’s 20 degrees outside. Or it could be because they want to screw you. Say you’re evicting them and so they run the heat with the windows open. This latter case is rare, I can only think of it happening to us once. But I hate the idea of it.
    Damon Allen Investor from San Diego, California
    Replied over 1 year ago
    The issue I’m running into with this is with small multi-family home in Indianapolis, IN. I have a 4-plex where submetering companies won’t even consider managing a small multi-unit. Is there anyone else running into this issue?
    Brent Wiebe Real Estate Agent from Eau Claire, Wisconsin
    Replied over 1 year ago
    I agree. I once bought a duplex that was separately metered, but the existing leases had the utilities included i the rent. The previous owner said that he was making more money that way. The same year I bought it we had a harsh winter. I went there one day to replace a drier, and noticed the tenants in one unit had the heat up way high, and the windows open. I got soaked that year with their utility bills, and changed their lease the following year. I noticed they stayed one more winter and moved on.
    Alim Manji
    Replied over 1 year ago
    I always install the separate meters for hydro electricity. The other reason that isn’t already mentioned is that some lenders look at utilities expense and will take that off your income for purposes of qualifying for a loan.
    Roderick Mills Jr. from Cincinnati, OH
    Replied over 1 year ago
    Great article! I think the point you made that made the most sense to me was that you attract better tenants that are more responsible since they are the ones paying the utility bill.