Why Landlords Should Reallocate Utilities to Improve Net Income

Why Landlords Should Reallocate Utilities to Improve Net Income

4 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

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One of the beautiful things about owning single-family rental properties is that for the most part, we as landlords don’t have to worry too much about utility bills, especially in comparison to the utility challenges of multi-unit properties.

We can still run into lienable water or even lienable gas (in some places like Philadelphia), but these have more to do with the tenant skipping town, leaving a big balance. Sometimes, though, it can be left on the landlord’s back.

If you ever do have a tenant who’s struggling with an electric or heat bill that’s lienable, try to convince them to get on a payment plan with the provider because then you as the landlord may not be responsible for any balance that’s left.

With single-family units, the only other challenges I can think of are large sewer bills if your tenant uses a lot of water, trash bills, heater/AC maintenance, or service contracts, which are usually more of a problem with oil heat if the provider requires that the tenants purchase oil from them and then they decide to go somewhere else.

Heat Challenges

With multi-family units, a whole new set of challenges may appear when it comes to utilities.

Recently, for example, one of my staff members was looking at a four-unit property that had a really good price on it, but as I dug deeper, I realized the units had steam heat.

Related: The Rookie Landlording Mistake Most New Investors Make

Anyone who has encountered this or has had to replace it will know what I’m talking about. It can be one of the most expensive things you can come across with heat, as you’ll usually need a whole new system, not just a new heater.

Once I bought a six-unit that was three stories high, with three two-bedroom apartments on the right and three efficiencies on the left, which had only one boiler.

In the first year of owning the six-unit, I noticed that whenever I went by there, the tenants on the third floor would have the windows wide open in January, and the folks on the first floors seemed to always be cold. Of course I had the thermostat locked in the basement, but it just wasn’t an efficient way to heat the building. So, I proceeded to strategize on how to separate the utilities.

Luckily, I had gas in the building, which is much easier to deal with than other types of heat, especially when it comes to tenants. Eventually, I put in electric heat on the third floor and for a time used electric heat in the efficiencies. Most people frown on electric heat for it being expensive, but I find that it works well on a third floor unit or with smaller types of units. Just be sure to get the electric provider to inspect the premises if you convert because the kilowatt is usually much cheaper if electric is the primary source of heat.

Later on, when I added a new high energy efficient boiler to the first floor unit (and left the older boiler to do the second floor), I had finally come up with a relatively efficient way to separate out the heat bills. This investment alone quickly paid for itself in only a short couple of years.

As for types of heat to avoid, besides oil (dirty) and propane (clean but expensive), there’s also wood. I’ve never had much luck with tenants using fireplaces and wood stoves.

If I’m unable to separate it, one type of heat that I would consider is solar. With a hot water system, solar panels may start to make more sense, especially if you can keep the property long-term. Not too many folks use geothermal due to the expense, so the next best thing might be to insulate better, and that might mean newer windows too.

As for hot water heaters, I prefer hot water tanks over the summer, winter hookups, and I’m just starting to consider the tankless, instant hot water units that are becoming more available.

Water Challenges

Separating water can be tough, too. Although I do know folks who have sub-metered water, most of my rentals have public water, and it’s not always easy to separate. With newer technologies, this may start to become easier to accomplish.

If it’s too cost prohibitive to separate or if you want to keep your sewer bill in check, which is often based on the water bill, you may want to consider more efficient toilets and showerheads or even remove some exterior hose bibs. Usually, we don’t allow swimming pools in our leases, and we blame it on the increased liability.

Related: How to Find the Right Rental Lease for Your Landlording Business

Multi-Unit Challenges

So, whenever you’re considering investing in more multi-units, you really have to consider all of these types of added expenses, especially with common areas, where you not only have to cover maintenance but the utilities as well.

Keep in mind, challenges and requirements may vary based on your location, climate, or usage.

A separate electric meter for common areas and landlord usage is something to consider. Also, some municipalities may require a trash dumpster as well if you’re purchasing a commercial building (anything more than four units).

For example, a good friend of mine who has single-family rentals and his father who has 52 units in three buildings often argue about who’s doing better. In some ways, the son has far less expenses on things like utilities, and he has fewer common areas.

So, what are some of your favorite strategies to save money when it comes to utilities in your rental properties?

Leave your comments below!

One of the beautiful things about owning single-family rental properties is that for the most part, we as landlords don’t have to worry too much about utility bills, especially in […]