How to start renting my second floor unit?

Question

Hello,

I have purchased a duplex as my primary residence for two years. Recently, I'm wondering that I should rent my second floor unit to relieve some financial pressure and to start building some experience. Since it is still my primary residence, I do not want to manage it through management company.

1. For leasing contract, do I need to contact an attorney to draft the contract? Or the Residential Lease Agreement from The Landlord Association of Pennsylvania is good enough?

2. Should I have the second unit inspected before renting it?

3. The utility meters are not separated. Is it legal to do rubs program and reimbursement tenant for utilities in Montgomery County? I did find some lease addendums for utilities online. Should I have it reviewed by an attorney?

4. Please refer me a good local contractor in Montgomery County.

Thanks for your patience. Any suggestion/comment will be appreciated.

Phillip Austin · Answer

Hi @Shang Min Wang! Here is my advice:

1. Some states provide standard rental agreements which I highly recommend using. You can add separate addendums, if needed, that are specific for your properties such as pet addendums. If you use a state provided contract, there's less of a need to have an attorney review. You can also use the BiggerPockets forms for your state. For everything else, I highly recommend spending the $500-$1,000 to have an attorney draft your contracts.

2. Absolutely! You inspect for two reasons: ensure the unit is rent-ready (necessary repairs) and to document condition upon move-in (in case you need to deduct any damages from their security deposit when they move out). The inspection is crucial! Do not skip!

3. Instead of doing RUBS, I would suggest reviewing usage for the last 1-2 years and billing the tenants a flat fee. Be careful! Some states do not allow landlords to profit from utilities.

4. BiggerPockets is a great resource for finding qualified local vendors. You can also search your local NARPM (national association of rental property managers) and review their vendor list. Good quality vendors often sponsor their local NARPM chapters because they understand PM companies in the area can be a consistent revenue stream.

Nathan Gesner · Answer

1. As a PRO member, you have free access to the Biggerpockets Lease Agreement Package under "TOOLS" at the top of your screen. Written by investors and attorney-approved for your state. I've literally reviewed hundreds of leases from around the country and the BP version is better than what you'll get from most attorneys or on the internet.

2. You should inspect the unit to ensure it is safe, clean, and functional. You should also document it heavily with pictures so you can hold the Tenant liable for cleaning or repairs later on. Photos of every wall, floor, ceiling, door front and back, cabinets open and closed, windows with blinds open and closed, etc. I will take 100+ photos of the typical 2-bedroom apartment. Digital photos are easy and cheap. With almost 400 rentals under management, I get less than 1% of my tenants complaining about deductions from their deposit and 99.9% of those complaints disappear when I show them picture evidence.

3. I don't have recommendations for a contractor. Go to BUILD YOUR TEAM at the top of the screen and search there.

4. Here's how to handle utilities with shared meters.

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.