Altering Tenant Utilities to Make Property CashFlow?

4 Replies

Is this a thing? I'm considering making an offer on a multi-family.  This would be my first multi-unit purchase. The only problem is that it does not cash-flow due to the owner paying ALL utilities. I don't want to start off negatively with tenants, but that's the only way I see this working. I was thinking to have them pay electric since that is the largest bill. What are your thoughts?

Newbie needing help. 

Hey Kathy - Leases come with the land, so whatever they have structured into their current lease is what will transfer with the property, and you will have to honor that agreement. However, depending on if they are month to month, how much is left on each current lease, etc., you can change this pretty quickly. If all of these leases were just signed and have 12-24 months left, you are going to be paying utilities there for a while...

Assuming utilities are separated to begin with, I'd have a new lease ready to go for the conclusion of their current one. Not sure where this deal is located or if you are planning on using a PM, but PMs will be fluent with this type of transition, too. I don't do it personally, but if in the Metro Detroit region, I could send you a recommendation or two. 

Hi Kathy - If the units are not metered separately you could consider apportioning the utilities back to the tenants.  Essentially you pay the utilities, then charge the tenants back for them on a monthly basis.  Research RUBS (Ratio Utility Billing System).  I do this when evaluating a deal.  It's one of my favorite and easy ways to create more value.  It's an easy way to reduce expenses.  You will want to research your local and state laws to make sure it can be done, and how it has to be done so you don't get in hot water.  Obviously, you'll need to see if the leases you are inheriting address the responsibility of utilities.  Good luck!

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Well, keep in mind that offloading the utilities to the tenants = an effective rent increase. It really depends how the units compare to anything else in your market. If apartments similar to yours rent for $800/month and yours rent for $800 but include utilities, you've now turned your apartments into $900 or more per month and you're not competitive. If you're already under market, then the current crop of tenants may resent the utility off-load (assuming you're off lease) and move, but new tenants will find the apartment competitive to everything else.

Bottom line is just think of utilities as one more piece of the rent of the unit. Whether you pay it or the tenant pays it, the overall cost and competitiveness is what you're looking at. It may be that the current place cannot be competitive if they don't cover utilities, in which case it's probably a bad deal. Or it may be that they were just too lazy to convert it and there's some money to be made. 

Potentially it could work but what do your competitors do? If all of they are doing all-bills paid then you might not be able to keep your occupancy by charging for utilities. Also, if the property is already non-cash flowing then you are likely missing other reasons beyond the utilities. Since you're new just be extra careful.