{"id":77699,"date":"2016-04-10T05:00:57","date_gmt":"2016-04-10T11:00:57","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=77699"},"modified":"2021-03-16T11:55:55","modified_gmt":"2021-03-16T17:55:55","slug":"2016-04-10-problem-billing-utilities","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-04-10-problem-billing-utilities","title":{"rendered":"The Not-So-Obvious Problem with Billing Back Utilities to Tenants"},"content":{"rendered":"<p>So, I did one of my scopes on <a href=\"https:\/\/www.periscope.tv\/\" target=\"_blank\" rel=\"noopener\">Periscope<\/a> this week. I do those now because I saw Brandon do a few and thought they were cool. I also saw Cardone do a few from his Rolls and figured that while doing my scopes from my Tesla isn&#8217;t quite as sexy (or perhaps more so depending on who you talk to), my personality makes up for it.<\/p>\n<p>So, on that scope I was talking to them about utility bill-backs, and Brandon, who was good to jump on, said I should write a post for BP.<\/p>\n<p>This will be short and sweet &#8217;cause I am busy. But I promise you will learn something today, so pay attention!<\/p>\n<p><span style=\"font-weight: 400;\">Here are some of the things you\u2019ve heard here on BP:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It\u2019s a good idea to buy <a href=\"\/renewsblog\/2013\/04\/09\/how-to-buy-a-small-multifamily-property\/\" target=\"_blank\">multifamily<\/a> &#8212; you heard this from a certain adorable nomad-looking, bearded dude by the name of Brandon.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If you\u2019re going to buy multifamily, it\u2019s a good idea to buy below intrinsic value (which means value add) &#8212; <a href=\"\/renewsblog\/2015\/12\/22\/buy-intrinsic-solid-real-estate-returns\/\" target=\"_blank\">you heard this from me<\/a>.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">One of the techniques of value add in multifamily is utility bill-back &#8212; you heard this from Brandon, Serge, me, and everyone else.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">All of the above is true; however, all of the above require finesse. Let\u2019s discuss utility bill-back!<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-77670\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/04\/keller-williams.jpg\" alt=\"keller-williams\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/04\/keller-williams.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/04\/keller-williams-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>Concept of DTI<\/h2>\n<p><span style=\"font-weight: 400;\">DTI stands for Debt to Income Ratio. Debt to Income Ratio, in its purest form, describes the relationship of one\u2019s income to one\u2019s debt. You\u2019ve likely heard of this term if you\u2019ve ever applied for debt.<\/span><\/p>\n<p><em><strong>Related:<\/strong> <a href=\"\/renewsblog\/2013\/12\/18\/truth-behind-tenant-turnover\/\" target=\"_blank\">The Surprising Truth Behind Tenant Turnover<\/a><\/em><\/p>\n<p><span style=\"font-weight: 400;\">This article is not about the DTI, but I need you to comprehend the concept. The idea that someone can only reasonably spend a percentage of their income to pay for things in their life is an important concept that\u00a0often gets lost in this conversation around value add.<\/span><\/p>\n<h2>For Example<\/h2>\n<p><span style=\"font-weight: 400;\">Let\u2019s say you have a 24-unit building,\u00a0where\u00a0you the landlord have to pay for the water and sewer, and those two utilities combine to about $2,400\/month. The 2-bedroom units in this building rent for $425. The rent is low, which is a reflection of the economic realities in Podunk, USA where you live.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One day, after listening to <a href=\"\/renewsblog\/2013\/04\/18\/cash-flow-creative-finance-life-ben-leybovich\/\" target=\"_blank\" rel=\"noopener noreferrer\">Podcast 14 with Ben Leybovich<\/a>, in which he talks about passing the cost of water to the tenants, you sit down and strongly consider charging each one of your tenants $50\/month for water and sewer. No, this wouldn\u2019t underwrite all of your cost, but it would help! So, here\u2019s what you need to consider:<\/span><\/p>\n<h2>RTI<\/h2>\n<p><span style=\"font-weight: 400;\">RTI stands for Rent to Income. I just literally invented this term as I am writing this. I mean, Brandon invents terminology\u00a0all the time, and he always sounds cold when he does (<a href=\"\/renewsblog\/2015\/04\/20\/how-to-100000-dollars-year-real-estate\/\" target=\"_blank\">BRRRR<\/a>), as he should\u00a0&#8212;\u00a0it\u2019s cold and dreary in Podunk. (Brandon &#8212; applause please.)<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Anyhow, Rent to Income is a play on words of Debt to Income and is meant to underscore the reality that what people can spend on living expenses is a function of how much they earn. And if you push them higher than this margin, bad things start to happen &#8212; more on that in a minute.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Well, your rents (in Podunk) are $425\/month. Why not $1,300\/month? Because there are 3 factories and a hospital in Podunk, and that\u2019s the extent of the economic base. That, plus McDonalds, plus Starbucks. And in this setting, $1,300\/month is what most people bring home on a monthly basis, which explains why the market for your 2-bedroom units is only $425. You know &#8212; 3 times the rent. Common sense!<\/span><\/p>\n<h2>What About Bill-Back?<\/h2>\n<p><span style=\"font-weight: 400;\">So $425 rent represents 33% of $1,300 take-home pay. Add to that electric, which the tenants are already paying for, and your tenants are already spending 50% of their monthly income on rent-related costs. And now you want to add another $50 on those costs &#8212; because you can.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Tell me &#8212; what happens to people when you push them too far? People break, right? Maybe not right away; perhaps they try the best they can to make it work. But eventually they break, and what happens then?<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-77510\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/03\/lawsuit.jpg\" alt=\"lawsuit\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/03\/lawsuit.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/03\/lawsuit-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><em><strong>Related:<\/strong> <a href=\"\/renewsblog\/2013\/09\/23\/cashflow-killer\/\" target=\"_blank\">Tenant Turnover: The Biggest Killer of Your Rental Cash Flow<\/a><\/em><\/p>\n<h2>Physical and Economic Vacancy<\/h2>\n<p><span style=\"font-weight: 400;\">People move out, forcing you to spend money on turning the unit. Or what\u2019s more likely, they simply default &#8212; stop paying rent &#8212; forcing you to absorb months of no rent, pay\u00a0eviction costs, and still have to turn the unit. Are you seeing the picture?<\/span><\/p>\n<h2>More Income or Less Cost?<\/h2>\n<p><span style=\"font-weight: 400;\">That is the question. Understanding that destabilizing the tenant base will cost money, what you have to figure out is whether the additional bill-back revenue will create larger spreads than the potential losses. It\u2019s a numbers game and a judgement call.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is a discussion of the economic environment you operate in. How much people can spend on life is a function of how much they earn. And while a water bill-back something you can do, the question is <em>should you?<\/em><\/span><\/p>\n<p><em>Investors: Do you bill back utilities to your tenants? Why or why not?<\/em><\/p>\n<p><strong>Let me know your thoughts with a comment.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>So, I did one of my scopes on Periscope this week. I do those now because I saw Brandon do a few and thought they were cool. I also saw [&hellip;]<\/p>\n","protected":false},"author":810,"featured_media":77707,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5183],"tags":[],"class_list":["post-77699","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-landlording"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/77699","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/810"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=77699"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/77699\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/77707"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=77699"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=77699"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=77699"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}