RUBS/ Utility bill back actually increase NOI?

Question

When looking at the opportunity to increase NOI through decreasing expenses the ability to bill back water/ utilities to the tenants clearly looks like a winning proposition. In many of the C+/B- areas I am looking for properties in NC many of the are master metered and water is included in the tenants monthly rent.

The rents per unit are below market (ex $50-150/door) and you are looking to increase the rent per door, but also make the tenants responsible for their own utilities. Win-Win right? Increase income and decrease expenses --> increase NOI!!

In my theoretical scenario I am thinking more C+/ B- tenant base. If you increase the rent, but also increase the amount the tenants need to pay for utilities is your tenant base really going to be able to afford both?

Do you really get the Win from the increase in rent and the Win from decreased utilities? Or are you just robbing Peter to pay Paul, by being unable to increase rents more because you are now also making the tenants pay for water? You do increase NOI, but not by the leaps and bounds that were predicted.

I know this can be dependent on comp properties in the respective areas and what they offer in regards to their tenants, just curious if that is the only litmus test for this type of underwriting scenario.

Kris Wong · Answer

If you are able to bill back utilities to tenants based on their actual usage, then it stand to reason that the tenants will consume less gas, water, etc... than if the LL is footing the bill. This can be a win-win by increasing NOI, and also allowing tenants to conserve and lower their utility bills below "normal". Obviously this doesn't apply to boiler heat, or other centrally controlled utilities. That's the value prop. However, submetering is generally quite expensive (at least that's my understanding). The NOI increase has to be significant to justify the investment. If you really want to evaluate the efficacy of such an investment, then you need to get a realistic estimate of the costs, and talk to landlords in your area that have installed such a system, to really understand affect on NOI. Only then can you determine if the returns outweigh the costs.

Todd Dexheimer · Answer

RUBS does not decrease expenses by much. Tenants likely will be more responsible, since they're paying the bill, but beyond that, it's a flow through.

Lower your expenses by changing out fixtures to low flow, changing out lights to LED's, upgrading heating and cooling systems if central, changing windows and insulating if central heat and air.

Also, do updates/renovations up front with high quality product, use technology to save time and effort from your staff. Put maintenance on a schedule, etc.

Greg Dickerson · Answer

Yes billing for utilities will increase the Income and NOI. The question is what's the cost to install the RUBS? How will that affect you in terms of competition? Will existing tenants renew when faced with increased rent and utilities especially right now? You would need to do a thorough analysis of the competition and what they offer in the same regard.

Evan Polaski · Answer

@John Blanton, I agree that it is not always as simple as higher rent/revenue + decreased expenses, although technically with RUBS your expenses are the same, you are just pushing bill back to revenue side.

I am not sure how many renters really know what utilities cost, especially if the are consistently living in older properties where LL typically pays some or all of the utilities.  In Cincinnati, it is common to have heat and water paid by LL in older properties, since it is one gas meter feeding a single boiler to heat the radiators in the various units.

That being said, you are generally talking about expense conscious tenants in that C-ish range.  While I think you will generally still be able to get tenants to lease the units, you may start seeing more turnover once the tenant realizes their net out of pocket is higher than market.  And how quickly you can fill those could completely wipe out the gains you made with rent increase and utility bill back.

John Blanton · Answer

Thanks @Evan Polaski makes sense! Will err on the side of being conservative to make sure my UW assumptions are correct in regards to stabilized and exit potential NOI

RUBS/ Utility bill back actually increase NOI?

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