What to do with utilities in a 5 unit when they are not split

18 Replies

Hi everyone-

Another question for all you experienced with multi unit rentals: There is a 5 unit I am interested in located in West Michigan and I'm thinking of placing an offer, BUT the property doesnt have split utilities. It appears that the owner pays all electric and gas (as well as trash, water, sewer). This will be a deal breaker as it just kills the cash flow, esp during cold MI winters. Any ideas on getting separate meters installed? Or installing submeters? Or even splitting the heating costs according to square footage of the units? I am sure there is a way to figure this out but not sure how to approach it.

Thanks for your insight!

Look into the cost of getting the units separately metered.  I'd rather pay to get them separately metered than pay thousands in utilities each month.  If someone else is footing the bill, they will not care how much is wasted or even if a pipe bursts.

My water is tenant paid and its not split.  I take the water bill and divide it up by unit based on how many people live in the unit.  If 3 people live in one unit and 1 person in the other unit.  Single person gets 1/4 of bill other unit gets 3/4 of bill.  No one has raised an issue with this to date.

Landlord paid utilities don't kill cash flow.  Paying too much for the property does.  Make your offer based on known income and expenses.  

K.marie P. - Interesting thought, but I wouldnt necessarily agree. For example, on the property I am looking at paying gas/electric/water/sewer/garbage comes to say, $500 dollars a month. Now, if the tenants paid all of this, that would add $500 dollars or $6000/year in cash flow. For this property, the purchase price is175K (under market value), which at 20% down comes to $818 dollars a month (amoritzed over 25 years at 5% interest). It would be impossible to get that number down to $318 dollars to make up for the $500 in utilites Id pay per month, unless I had a boat load of cash, which I dont (and the cash on cash return would head waaay south too). Im curious to hear more about what you're saying...def open to it but thus far cannot agree :) Thanks!

@Ryan Kuja

But the rent should be higher to offset the higher expenses.   Is the combined rent $500 a month higher versus comparable units in the area that don't include utilities?  

- Tom

@Tom S. - Great point. The rents do not seem any higher than others in the area to offset those added expenses. Not sure why.

@Ryan Kuja

Then I would consider passing on it.  I have a 5 unit where I do include most of the utilities but remodeled it nicely and can command higher rents to offset the expenses.  In fact, I get more responses when advertising versus another place I have that doesn't include utilities.  A lot of tenants like the piece of mind of knowing they have a fixed amount of expenses each month.  There are pros and cons of course.

Good luck!

- Tom

Thanks @Tom S. . Thats helpful. I also think there may be room to get the rents up a bit. Its a 5 unit, with a 3 bed and the rest 1 beds. Could maybe get the 3/1 up $50 and the 1/1's up $25 or so which would help the cash flow...

By the way, I attended UVM from 2000-2004. Go Catamounts! :)

Originally posted by @Tom S. :

@Ryan Kuja

Then I would consider passing on it.  I have a 5 unit where I do include most of the utilities but remodeled it nicely and can command higher rents to offset the expenses.  In fact, I get more responses when advertising versus another place I have that doesn't include utilities.  A lot of tenants like the piece of mind of knowing they have a fixed amount of expenses each month.  There are pros and cons of course.

Good luck!

- Tom

Utilities included is a total draw in some markets.  Some tenant pools just love it.  Student populations (and their paying parents) for example. The rents on those units are higher, the tenant pool is not confused by this.  "All inclusive" is a marketing tool.

If I had good utility usage history from the utility company (2 years) and could see predictable patterns, I'd use them in my cash flow calculations and wouldn't have any trouble making an offer on such a property.

K.marie P.- thanks, that is good. I was not aware of different rental pools looking at things differently in terms of what they want, all included vs none etc. Makes sense. So if I am here you right, you would focus mainly on getting the right property at the right price and not to allow utility issues to be deal breakers, yeah? That would be a relief if its the case, since I am mainly looking in the student areas of Kalamazoo, MI and made a decision ONLY to consider multiunits that had separate meters. Perhaps I should reconsider!

Thanks!! :)

Originally posted by @Ryan Kuja :

@K. marie P. - Interesting thought, but I wouldnt necessarily agree. For example, on the property I am looking at paying gas/electric/water/sewer/garbage comes to say, $500 dollars a month. Now, if the tenants paid all of this, that would add $500 dollars or $6000/year in cash flow. For this property, the purchase price is175K (under market value), which at 20% down comes to $818 dollars a month (amoritzed over 25 years at 5% interest). It would be impossible to get that number down to $318 dollars to make up for the $500 in utilites Id pay per month, unless I had a boat load of cash, which I dont (and the cash on cash return would head waaay south too). Im curious to hear more about what you're saying...def open to it but thus far cannot agree :) Thanks!

Rents when utilities are included are not the same as rents for separately metered and billed units.  You account for utilities in the higher income. 

Be mindful of your demographic.  Sounds like the property might be low income and/or C class.  Make sure your tenant pool can handle the required income, credit and cash needed for opening utility company accounts. 

Originally posted by @Ryan Kuja :

@K. marie P.- thanks, that is good. I was not aware of different rental pools looking at things differently in terms of what they want, all included vs none etc. Makes sense. So if I am here you right, you would focus mainly on getting the right property at the right price and not to allow utility issues to be deal breakers, yeah? That would be a relief if its the case, since I am mainly looking in the student areas of Kalamazoo, MI and made a decision ONLY to consider multiunits that had separate meters. Perhaps I should reconsider!

Thanks!! :)

I would never rule out a property based on landlord paid utilities.  Really depends on unit size and heat type and whether there is usage data history available.  If this property is an anomaly in the market, even better.  Although I doubt that would be the case in Kalamazoo in that price range.  If everyone else is shying away from it, then I want to be the one to make the only offer the seller receives.  The offer that is seriously discounted.

I am not sure that you would be comparing apples to apples on rent vs. rent including utilities.  Here in LA there are still many apartments that are not individually metered.  What is advertised is the actual rent but when you sign the lease agreement it states that utilities are added to the rent amount.  The tenant gets the bill each month tacked onto the rent amount.  The bill is being sent by a 3rd party utility provider that is contracted with property management.  If you have $500/month you divide that by the number of units (or by the number of individuals living in each unit) and add that on.  I wonder if there is a law or regulation that wouldn't allow you to do it this way?

@Ryan Kuja Just as a bonus tip. If you're looking in the student areas of Kalamazoo, you are quite likely in a historic district so make sure to find out if it is or not. It's not a huge pain to deal with the commission, but they are very particular about what they will allow you to do to the exterior of the house. Thankfully, they have no say on the interior, but any changes to the exterior (including not allowing vinyl siding) must first go through their approval process.

Here is a link to some useful information including maps of the different historic districts in town: http://www.kalamazoocity.org/local-historic-districts

Give an offer price like you are going to have to keep paying the utilitys, if they take it great! them as soon as those people move out go to a RUBS systems. if they don't take the offer then walk. Either you will get a great deal or keep yourself from making a bad one.

@Ryan Kuja  So great to hear of another UVMer on the site!  Burlington, VT is definitely a beautiful city.

Good luck with this potential deal, and feel free to reach out to me with any questions!

- Tom

Hi Ryan,

It sounds like a great opportunity to me. If the rents are no different from similar units where tenants pay utilities, then it is quite safe to say that the units are under-rented. In most of my properties, tenants pay the bulk of the utilities, but on some I pay all of the utilities- in my experience, you don't quite recoup every penny when you're paying all of the utilities, but you should get most of your money back through higher rent.

Here's what I'd do in your position- use the low rent relative to expenses to get a lower purchase price, then as leases expire, raise the rent to market, explaining to your tenants why you're doing it. You'll undoubtedly lose a tenant(or three,) but after a year or two you should have all of the units at market rent.

Another thing you could do is replace all of the bulbs with LED bulbs- if they are currently incandescent, you can cut overall electric usage by 10-15%. Here's a 100 watt replacement bulb and a 60 watt replacement bulb, respectively- I use these in all my rental properties, they last for decades and save tons of money:

GE 15 watt replacement for 100 watt LED

FEIT 60 watt replacement (uses 9.5 watts)

After fixing the lighting, I'd work on insulation and the building envelope as units turn over, as well as installing water-efficient fixtures(1.2 gpf toilets, water-sense faucets.) If you can reduce your utility bill substantially, you can turn this building into a lovely asset. Good luck with it,

Michael

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