Bigger pockets. Can I get someone to explain how the RUBS system works if you own an apartment building and looking to bill back for water, trash etc?
Let's say the operator is paying $40 bucks per unit. How much of that can he bill back to the tenant?
RUBS can be a complicated issue as some municipalities do not allow it. In general, RUBS allow you to split the expense of water, trash, etc on a pro-rata basis and add it to the tenant's rental amount.
As William said, some municipalities do not allow it, so first check with your provider. To your question; in theory, you could bill the entire cost to tenants. If you're in the right situation to implement a RUBS system, it's an awesome way to decrease expenses, thus driving up NOI and FMV.
I don't think you can ever bill back 100% of it--as you have common areas, vacant units, etc.
In our 100+ unit properties, we generally underwrite to getting ~75% of Utilities paid for by tenants. If you can find a property not currently on RUBS it can be a major value add to your deal.
@Michael Bishop Thanks
@William Shimerman Appreciate it
@Andrew Campbell Appreciate the insight.
How does it actually work? I know that there is a left over expense if you can bill back 75%. Are you paying the 100% up front out of your cash flow, profit or reserves and then bill the tenants back? Since you are billing back 75% is this considered income, even though you are paying 25% of the utilities? And I'm assuming the 25% is considered an expense?
@Tj Hines As Andrew mentioned, because of common areas, etc you will have a difficult time recovering 100% of the utilities ( I try not to use the word "never"). Check with your local municipalities, however, in Los Angeles the owner pays for the expenses and then "bills back" the RUBS fees to the tenants. The way our team values deals, we include RUBS as "additional income" and the owner's portion as expenses. That way everything is accounted for.
The above comments are very useful and I will echo what @Andrew Campbell is saying i.e. you can't ever bill back 100%. Also, RUBS is municipality dependent and not all municipalities will allow it (check where you're investing to confirm).
In Texas as an example, the Texas Commission on Environmental Quality (TCEQ) has defined regulations for how tenants can be billed, what deductions an owner must take, what billing fee can be assessed, and more. In contrast, Colorado allows RUBS billing with very few limitations.
To learn the rules, contact one of the following:
- Your State’s Public Utility Commission
- Local National Apartment Association (NAA) Affiliate – http://www.naahq.org/about/join/Pages/AffiliateDir...
- A third party utility billing services provider.
As to how RUBS works:
A ratio utility billing system or RUBS billing is a method of calculating a resident's utility bill based on occupancy, apartment square footage, number of beds, or some combination of factors.
Using RUBS to bill residents for water, gas and/or electricity expenses has several advantages including:
- Requires no capital investment to get started
- Enables owners to recoup a large portion of the overall utility expense
- Can be implemented quickly
- Immediately improves cash flow.
You’ll need a lease signed by your residents authorizing utility billing. If your current lease doesn’t address billing, draft a lease addendum and encourage tenants to sign it. You may have to implement the lease as tenants renew and/or when new residents join your community.
The articles in the references section (below) offer greater detail as well as videos to help you.
@Tj Hines another strategy is to just increase rent. It will all depend on your demographic and comps in the area. Most tenants are sophisticated enough to understand that no one gets a free lunch and they will be paying for it one way or another. We've done this at one of our properties with great success. Cheers!
@William Shimerman thanks it’s more clear to me now.
@omar Kahn thanks for the detailed explanation. I fully grasp the concept now.
When you "bill back" your tenants using RUBS, do you use an average to determine the amount to charge or the previous month's actual expenses, or other method?