In our experience of managing units and acquiring an investment portfolio, we have found that utilities are the most under-rated part of multifamily investing. Investors typically are good at analyzing things like maintenance, rent, vacancy, and more. But often utilities do not get as much attention.
Here are a few key things to evaluate when looking at utilities.
How to Lower Utility Bills in Multi-Unit Properties
1. Lease or Rental Agreement
First, make sure the lease is set up for tenants to pay any utility that isn’t shared. This includes water, heat, electric, trash, etc. A signed lease that’s not written in a way that clearly specifies the tenant is responsible for utilities can be a very expensive mistake.
We have seen many examples where an investor meant to bill tenants for utilities but forgot to include it in the lease. This error could easily cost the owner $2,000 over the course of the year. If you inherit a lease that does not include tenants paying for utilities, get the tenant a new lease with new utility terms as soon as the old lease has expired.
Make a calendar invite for yourself, so you or your property manager doesn’t forget!
2. Electric Bill
Typically, electric can be put in the tenant’s name and billed directly to him or her. However, the tenant still needs to make sure they set up the electric in their name when they move in to the apartment or house.
You may have electric in your name to make sure heat is on in the winter or to show the house well. The rule of thumb is to ask to see the electric account in the tenant’s name prior to move-in. If for some reason electric was not in tenant’s name for a month, you can still bill the tenant, assuming your lease is set up properly.
Be careful that tenants don’t turn off electric during their lease with the electric defaulting back into your name. This can especially come up when tenants have stopped paying rent and are in the eviction process.
3. Water Usage
Keep an eye on any water bill that is higher than normal for multi-unit buildings with a shared water bill. As a quick check, we look to see if the water bill is higher than the last water bill received. Water bills can be monthly, quarterly, or any other time span the municipality picks. So, it’s very tricky to tell if water is high by JUST looking at the number.
If the water bill is higher than normal, we immediately put in a work order for our maintenance guy. We have him do a walk-through to ensure toilets aren’t running continuously and to look for any other water leaks. While this again sounds pretty basic, we have found that you can save thousands for multifamily complexes by checking water usage.
4. Eco-friendly Appliances
If you are seeing water bills higher than what you expect, an additional way to save money is to change out the toilets and shower heads to more eco-friendly versions. We have seen a 15 percent savings on average water usage by making these changes, obviously with variance depending on the situation.
To avoid breaking the bank, make the change during an apartment turn. In general, we try to keep major work for when units are already vacant.
5. Gas vs. Oil vs. Electric Heat
I saw a wholesaler pitch their deal for a 6-unit building at a meetup, and he didn’t know the type of heat for the property. Attention all investors, agents, and wholesalers: The type of heat matters!
Oil heat can be twice as expensive as gas heat! And it matters even more if the heat is separate meters or one common meter. Obviously investors prefer separate meters, but it can be expensive to separate them if they are not set up that way currently.
When meters aren’t separated, we typically will bill the tenant a set monthly fee for utilities. The utility fee includes anything that’s shared. This is helpful because it enables the rent to be advertised at a lower rate, as opposed to bundling the free heat cost in with the rent.
Make sure the lease is written in a way that clearly explains how the tenant will be billed each month.
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6. Sub-Metering Water
Many multi-unit apartment complexes have one common water meter. This causes issues in terms of billing a tenant directly for water. While there are work-arounds such as RUBS (Ratio Utility Billing System), there are some major drawbacks.
Many local courts (but not all) will not accept RUBS as a fair form of billing. Judges do not like that there is not a one-to-one ratio of utility bill to tenant usage. The other issue is tenants are not as economical in their usage since their bill is not directly related to their usage.
So, what do you do if you have a common water meter for a multi-unit building? Depending on the setup of the building, it can be a lot cheaper than you’d think to break out separate water usage and bills for each tenant via sub-metering. Typically, tenants pay the monthly admin fee directly. Then, the only major cost is the initial plumbing work and the cost of the sub-meters.
We view sub-metering as a form of improvement/investment in the building. It will pay for itself over the years. But more importantly, it will dramatically increase the value of the property. When you go to sell or refinance, properties are valued off a multiple of the cap rate. The cap rate includes the water usage, which will be basically zero after sub-metering.
7. Trash Removal
In many cities, you can get a private trash hauler to take away the trash. We have found you can save a significant amount of money by shopping around for this service, so don’t just use the first place that you contact!
Make sure that you check to ensure the city is OK with shopping trash haulers. Some cities have city mandated trash services that you must use.
The Bottom Line
In a red-hot multifamily market, utility management can give you a huge advantage as an investor! But too often, the points above are overlooked. I encourage you to examine each and then kick back and save money on utilities!
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.