So my wife and I came up with this kooky idea to build a cottage in the backyard in which we'd live so we can rent out our main house. The main house is 2br/1ba 970sqft. The cottage is 250sqft.
We're not quite sure how to deal with the gas and electric bill. Here are some options:
1 - Gas and electric is included in rent
2 - We split the bill (for example: tenant pays 2/3, we pay 1/3)
3 - Tenant pays total bill
#1 doesn't sound appealing. We use VERY little gas and electricity, and we're afraid a typical tenant will be cranking out the watts and therms. #2 sounds good, but we're not sure if this kind of thing is normal/legal in California. #3 sounds even better, but not sure the tenant would like paying for us and the whole potential for legal issues.
What option would you choose and why?
I'm in Los Angeles and I rent out two spare rooms in my house. I include all utilities in the rent.
- More attractive to tenants (less hassle, predictable, easy to budget)
- Much easier for me - I don't want to be calculating different numbers every month and tracking them down for different amounts each month. I'd have to deal with providing proof to them to justify the amounts etc.... Ain't nobody got time for that! (lol!)
If I was a tenant, I would feel a little bit queezy every month if you showed me the utility bills so I could pay them, and I'm paying the full amount on the bill. #3 wouldn't fly with me :)
Thanks for your feedback Mehran. I didn't think #3 would fly. I also get what you're saying about the awkwardness of showing the tenant the util. bill every month and asking for their portion.
Still, I feel uneasy giving free rein to the tenant to use resources without any cost. It seems there'd be too much incentive to leave lights on and crank up the heat during winter.
Has anyone else successfully done something like option #2?
What about if you did a cap in the lease.
Rent includes utilities up too X. . Anything above will be paid by tenant.
This is becoming the new "Thing". The military bases are starting to do this practice to discourage waste.
@Nick Jensen I agree with what Elizabeth said. you can also add wording such as
"All utilities are covered by the rent as long as they are used in reasonable amounts."
I'm sure there's a fancier way of saying this, but the key word is reasonable. This gives you an out if they just literally run water and everything all day.
You can make a "House Rules" addendum to add to the lease (that they must sign as well) that states they should be mindful of utility costs and to turn off lights in rooms not being used etc. I do this and it generally sets the tone when people move in. Verbally going over each item before signing will help as well.
I do pretty solid tenant screening and I lead by example. But since I live here too, I like to have people on Month to Month leases so we can part ways without drama if things are not working out.
If the cottage is legal, install separate meters when it's built.
@Wayne Brooks has the best idea with the added benefit of making the property more attractive for resale. If your cottage isn't going to be legal you may actually lower the value of the property by the amount it'll cost a potential buyer to remove the illegal cottage.
If you and your wife are moving from 970 sq ft to 250 sq ft, I would plan on getting divorced in about a year. Start hiding cash now for when you need to start over.
@Elizabeth C. That's an idea that we considered but thought wouldn't fly. If it's more common these days, then I think it's the best solution for our situation.
@Troy Sheets Well, the cottage is permitted as an accessory structure, not a dwelling. So the structure itself is legal. We'll just be using it as a dwelling. But because of this we can't install a separate meter. Too bad, because that would be the best solution.
@Rob K. I love my wife. We've been married for 7 years. In our main house we're either cooking together, eating together, sitting on the couch together, or in bed together. Most of the main house is just wasted space.
The benefit of doing what we're doing is that we can retire in our early 30s, even while living in a very expensive part of the country. Living in a tiny space has its benefits!
I think it would fly. All the military bases are slowly transition over to this model. I would use the word reasonable as @Mehran K. stated only I would define that word.
Will your market area support all utilities. In the areas we rent, increasing the rent by $75 will cause people not to see the house because of it would be outside of their search criteria. In order to allow you to be closer to market rent. I would advertise the house at 5-15% below market rate in order to get great canditates. I would not mention your house or utilities at all in the advertising.
While you are prescreening candidates I would mention the situation and that a flat rate of X will be added to the rent for utilities as long as the utilizes are not abused (which is defined).
Here in PA there is a state law that prohibits #3, you might want to check your local and state law to see if #3 violates the law there. Here the penalty is that the owner has to pay ALL the tenant bills back to the beginning of the arrangement, which in some cases could be years of free utilities for the tenant.
There is a #4, separate the utilities, physically. Install 2 electric meters, install 2 gas meters, it will cost you some bucks, but it prevents any disagreement as to somebody paying more than their share. There have been studies that show that when utilities are free the tenants use 20% more than when they have to pay for them. If you're in it for the long haul, imho, #4 is the clear choice.
PS #3 could result in jail time.
Alos, I haven't seen them but I believe there some co.s that actually install "private" meters to separate utility usage among multiple tenants on a shared utility. You should be able to find some type of meter that would measure at least the electricity being fed to the "accessory structure", which would take away any questions of who is using what.
Not sure where you are in the Bay Area, but I called Weights and Measures in Santa Clara county once about sub metering water (gas and electric is already separate) and my concern was more in the way of using an approved meeter. They stated that they would have no involvement/jurisdiction over my plan. You probably can't have two separate connections unless it is zoned as a multi family property i.e. in-law units generally don't qualify.
Water meters are fairly inexpensive and take relatively little skill to install; for the gas and electric I would hire this out unless you really know what you are doing. At 250 squares I would be inclined to pay for your actual usage at base tier and the tenant would pay the rest of the usage. As a measure of good will, you pay for the connection charge or split it. Write it up clearly in the lease/rental agreement. Presumably you can just measure the cottage use. It will take 15 maybe 20 minutes per month do do the record keeping and math.
People more often will use more resources when they don't have to pay for it - this keeps it fair and when all parties know what to expect there is less of a chance for hard feelings and disagrements.
Get a separate electric meter for the cottage and heat it using electricity (heat pump is an option). That way each unit pays its own way for heat and electric. Water and sewer might be tougher to separate - but you might want to consider that up front since those utilities are always buried.
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