Need suggestions on how to handle utility costs for house with "efficiencies"
Miami, FL · Member since 2011 · 296 posts · 72 votes
Need suggestions on how to handle utility costs for house with "efficiencies"
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
1yQuote from @Allende Hernandez:
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 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 fairest 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 electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a 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 annually 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 more complicated than it has to be. If you have four 2-bed/1-bath 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 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath 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 can hear the upstairs neighbor showering twice daily. You can end 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 with 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 many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.
The DIY Landlord Book4.7248 Reviews
8 Replies
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes1y
Have an electrician install sub meters for all the units
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes1y
Quote from @Allende Hernandez:
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 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 fairest 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 electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a 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 annually 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 more complicated than it has to be. If you have four 2-bed/1-bath 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 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath 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 can hear the upstairs neighbor showering twice daily. You can end 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 with 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 many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.
The DIY Landlord Book4.7248 Reviews - 1yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
We hate putting the utility bills in our name but in these situations that is what we do. We then charge the tenant a monthly flat fee for the utilities. This normally happens in 5+ where the water isn't separately metered, so, we charge the tenant $75/mon for a 2/2 and $50/mon for a 1/1.
You can also get the bill and divide it evenly throughout the tenants, but we have found that the tenants complain about this method - I do us as much as so and so, I should be charge less. With the flat fee everyone is happy, and the owner typically makes a few bucks.
Bartomeo Property Management4.7150 Reviews - 1yAndrew FreedBusiness MemberInvestor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
@Allende Hernandez - I'd definitely look into separating the utilities and putting the cost back onto the tenants. That is the ideal scenario for this investment.
On a side note, you cannot have a tenant foot the utility cost of other units, that is illegal. They are essentially paying for usage that isn't theres. You either cover the utilities for the entire building or separate the utilities. You can also attempt some sort of bill back like RUBs but that can get complicated quickly. Good luck with your first investment property.
- Miami, FL · Member since 2011 · 296 posts · 72 votes1y
Quote from @Nathan Gesner:
Quote from @Allende Hernandez:
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 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 fairest 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 electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a 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 annually 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 more complicated than it has to be. If you have four 2-bed/1-bath 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 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath 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 can hear the upstairs neighbor showering twice daily. You can end 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 with 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 many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.
Thank you very much @Nathan Gesnert! This certainly gives me some ideas to work with. I'll start calling the utility companies to see if they are able to give me the last 12 months usage.
- Miami, FL · Member since 2011 · 296 posts · 72 votes1y
Quote from @Adam Bartomeo:
We hate putting the utility bills in our name but in these situations that is what we do. We then charge the tenant a monthly flat fee for the utilities. This normally happens in 5+ where the water isn't separately metered, so, we charge the tenant $75/mon for a 2/2 and $50/mon for a 1/1.
You can also get the bill and divide it evenly throughout the tenants, but we have found that the tenants complain about this method - I do us as much as so and so, I should be charge less. With the flat fee everyone is happy, and the owner typically makes a few bucks.
@Adam Bartomeo in the area where the property is, for the smaller units, it is common expectation that all utilities are included with the rent. There is a surcharge in rent that goes up with the number of tenants per unit, this is also known and accepted as normal. What I think I can do, as suggested above, is to try to get an average usage per month and increase the rent for the main house and smaller units certain amount and make it part of the rent, at least to offset part of the cost.
Than you!
- Miami, FL · Member since 2011 · 296 posts · 72 votes1y
Quote from @Andrew Freed:
@Allende Hernandez - I'd definitely look into separating the utilities and putting the cost back onto the tenants. That is the ideal scenario for this investment.
On a side note, you cannot have a tenant foot the utility cost of other units, that is illegal. They are essentially paying for usage that isn't theres. You either cover the utilities for the entire building or separate the utilities. You can also attempt some sort of bill back like RUBs but that can get complicated quickly. Good luck with your first investment property.
Thank you Andrew. Splitting utilities may be an issue in this situation. Costly and logistically. I am looking for alternatives.
Thank you for the tip about gooting the utilities.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I think this era it is more important to have the utilities paid by the tenants. Utilities are costly (my market likely has the most expensive water in the country and electricity costs that are in competition for highest in the country). It promotes conservation. Here are some extreme cases that are mostly 21st century issues:
- cannibus is legal in many states. Growing cannibus can require high energy and water consumption.
- bitcoin mining can be energy intenseIn addition, I want tenants to report any leaks as soon as discovered. I find this is more likely to occur when they are paying the utilities.
Create as equitable utility division as you can, place this utility expense in each lease, and charge the tenants per the utility usage. If tenant has complaint, point to the lease, that they agreed to this utility cost, and indicate they can terminate their tenancy at the end of the lease.
Good luck
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