Solutions for utility payments

[Kate Jones]

Hey BP.

I am currently looking to move from NY to Louisville. I read on the landlord-tenant laws that the landlord is in charge of paying the utilities. That is around 350 a month. From my understanding, some tenants know that they are not the ones paying for those bills. Therefore, they take advantage by not turning off the lights or the water and turn up the heat whenever they want. That increases my bill and creates an issue. There are no incentives from a tenant point of view regarding utilities. Has this happened to you? If so, what was your solution?

[John Underwood]

I do not pay my tenants utilities. That is their responsibility. 

[Kate Jones]

Quote from @Kate Jones:

Hey BP.

I am currently looking to move from NY to Louisville. I read on the landlord-tenant laws that the landlord is in charge of paying the utilities. That is around 350 a month. From my understanding, some tenants know that they are not the ones paying for those bills. Therefore, they take advantage by not turning off the lights or the water and turn up the heat whenever they want. That increases my bill and creates an issue. There are no incentives from a tenant point of view regarding utilities. Has this happened to you? If so, what was your solution?

 I am sorry! I meant to mention I am looking to house-hack my first property. In that case, what would the solutions be?

[Nathan Gesner]

Kate, you're misunderstanding something. The Landlord may be "generally" responsible for keeping the utilities on, but you can make the tenant responsible for setting up their own utility accounts and paying the utility providers directly. Or you can keep the utilities in your name and pass the bill on to the tenant each month so they are paying for exactly what they use. 

The only time you'll have to include it in rent or do the hard work of dividing charges is when you have more than one unit sharing a single utility meter. Here's my basic guide for utilities:

HOW TO SHARE UTILITIES 101

You have a property with two or more units and the utility meters are shared. There are a few options.

1. Pay to separately meter the utility. This can be very expensive and is usually the worst choice to make because you can't justify the cost.

2. Charge the tenants a higher rent rate and include utilities with their rent. This is the simplest method, but it also means your tenants are more likely to abuse the utilities by leaving windows open with the heat or A/C running, leaving lights on, ignoring the toilet that constantly flushes on its own, etc.

3. Pay the bill yourself, then reimburse yourself by charging the tenants based on a formula. This takes a little more work, but it's the most fair and reduces the likelihood of tenants that squander utilities.

If you choose #2 or #3, there are considerations:

Start with an average. Use varies throughout the year. Heating costs go up in winter, as does electric due to the reduced natural light and people being indoors more. Electric can also spike in the summer with A/C. Contact the utility provider and get an historical average based on the last year of use. It won't be 100% accurate, but it will be close enough. I recommend you do this each year to adjust for utility increases and other variables. If your average heating bill is $150, you may not collect enough in the winter months when the bill reaches $225 but you'll collect extra in the summer when it drops to $65. If you base your tenant charges on the historical average, you should come very close to collecting the entire amount over a one-year period.

Charge a higher rate. If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility. If the bill is $100 a month split between four units, increase it to $120 and charge each tenant $30.

How to calculate charges. Don't make it harder than it has to be. If you have four 2bed/1bath units with the same appliances, split it four ways and call it a day. You can make minor adjustments based on the type of appliances (dishwasher, clothes washer and dryer, air conditioning, etc.) and the size of the rental. If Apartment A is a 2bed/1bath with washer/dryer and Apartment B is a 1bed/1bath with no washer/dryer, Apartment A should pay a higher rate. Another option is to split the cost based on the number of occupants in each unit but this also means you'll need to adjust the charges as tenants move in/out, so it requires more work and I wouldn't recommend it. I recommend a simple spreadsheet to check your math and it will make it simple to adjust each year.

End the complaints. Tenants may complain about your method of calculating how much each unit pays. They think it's unfair because they only shower once a week but they can hear the upstairs neighbor showering twice a day. You can put an end to this by showing them an actual utility bill. Why? Because a large percentage of the charges are base fees that do not change based on use!

I just looked at a utility bill and it has a total charge of $184.12 but $116.50 is from base fees! If I divide this bill by four units, each tenant would pay $46.03. If they were separately metered, each tenant would pay the $116.50 base fees and their individual use, which would be 3x higher than what they pay when sharing a meter.

There are a lot of options out there, but don't make it more complicated than it needs to be. Tenants actually save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.