Question About Utilities

[Jake I.]

I see on most of the Bigger Pockets blogs, podcasts, or webinars that when analyzing a property and its expenses, many times utilities such as water/sewer/garbage, electricity, gas, etc. are thrown into the expense column. My question, is the landlord paying for some or all of these utilities common?

Every place I've ever rented be it a house or apartment, I was always responsible for the utilities. It makes sense to me that I would have the renter responsible for all utilities creating less expenses for myself as a landlord. In my experience it didn't appear that I was getting a deal on rent because I was paying for all my own utilities.

Does it depend on your city, state? Does it depend on the area of town? Is it harder to rent to middle to lower income neighborhoods if you're not paying for those utilities?

I live in San Antonio, Texas and have rented both here and in Tucson, Arizona.

Thanks in advance for all replies.

[Justin Kane]

Hey Jake,

To put it simply, its all perspective based, so for instance, in peoria AZ where you have older families with more money or snowbirds that have money and just want to rent during the winter, they dont mind paying higher rents so you could envelop the costs into your per month charge making it easier piece of mind for the renter. 

here in san antonio, a blue collar town, they dont have the money so its better to put the responsibility of utilities on the tenant (in most cases) 

so for both paying utilities yourself you would add the total of cost to your monthly expeses

for tenants paying utilities you would avg. your vacant expense cost for utilities per year and divide that by 12 to have your monthly expense for utilities.

hope this makes sense :/

[Dana Dunford]

@Jake I. - It depends on where you are located and the type of building. In many cases, the utilities are for the entire building (and difficult to split by unit), which is a case for incorporating into the rent amount. In other cases, it's easier to track and split, therefore you may want to have the tenant pay (to avoid some crazy situation, such as someone mining bitcoin and using your electricity to do it ... it happens). You can also check what is common in your city. Hope that helps!

[Jake I.]

@Justin Kane @Dana Dunford Thank you both for your answers. Makes a ton of sense and very helpful.

[Josh Nicolson]

For me it completely depends on how the building is built. If it's seperately metered I make the tenants pay. If it's master metered, I pay the utility. 

Even in Arizona I buy properties with master water meters and I foot the bill. However, I stay away from properties with master electric meters. If I do buy it, I spend the money to split the master electric meter into individual meters. 

Seperately metered utilities makes life more predictable. And when you split the meters, tenants are more responsible, and everyone involved saves money (tenant and landlord alike).

[Seth Teel]

@Jake I. I own duplexes in St. Louis and here in San Antonio.  In St. Louis your city refuse (Trash & Recycle Dumpsters in the alley) is tied to your water bill and oddly water charges are based on number of rooms in the home and stormwater fees, not actual usage. In this case it makes no sense to have the tenants pay water and it is the expectation of the tenants in STL to have the landlord cover Water, MSD, & Refuse.  

In San Antonio most duplexes and even small multifamily properties don't have separate water lines/meters for each unit.  If you want to create separate lines and meters it is at the cost of the property owner (not the utility) and SAWS charges an "impact fee" of $2000 - $3000 for each new line.  These costs alone make it much more affordable to just have the property owner pay the water bill.  If I owned single-family rentals, I would have the tenant pay water.  

All of my tenants pay electric/gas, phone, internet, & cable (if they want them). I do require all tenants to have utilities turned on and have a minimum temperature requirement for the furnace during winter month in St. Louis.  I pay for standard bi-monthly pest control, but if additional services are needed as a result of the tenants lifestyle, they are responsible.  Again, if it was a single-family, I would require the tenants to pay for standard pest control.     

[Shawn Ackerman]

Separate meter? That expense goes to the tenant!!!  Unfortunately if you have a triplex or duplex with one meter you have to bite the bullet, however your rental price should reflect gas and electric expenses(give yourself as much cushion as the market will allow for a utilities included unit).  But if the meters are separate gas and electric are on the tenant.  I think water and sewer are typically the owners responsibility.

[Tavisha Grant]

Here in Arizona I think it would be a mistake to include electricity.  In the summer during our scorching hot season when temperatures are regularly over 100 degrees, tenants would run their units at 60 degrees - putting a lot more stress on the HVAC system.  I can see including water/trash/sewer.  However, I would never do electricity or gas.  That could bite you in the end.

[Jake I.]

@Seth Teel @Shawn Ackerman Thanks for your replies, guys. I hear what you're saying, and will definitely be looking for separate meters when I am hunting for properties. It sounds like you both may still be leaning towards paying water (here in San Antonio water includes sewer and garbage) as the owner even if there are separate meters. Am I understanding correctly?

Again, I have lived in a 300 unit apartment complex, a four-plex, and a single family house in San Antonio and I was responsible for the water bill and didn't think twice as it was just another utility. Thanks again, I just want to be clear because a water bill could be quite a significant expense when analyzing a property for cashflow.

[Don B.]

What do you think it would cost to separate a master electrical system, into separate for a duplex?

[Shawn Ackerman]

@Jake I. I Agree with you on the expense of the water(the property I'm looking at the water cost is $72 per month and a $46 trash/refuse quarterly), I will consider eliminating the water bill in an upcoming rental and see how it goes.  However I do know that it's a typical expense put out by the owner.  I think I need to buy in Texas!!! LOL.  Oddly enough I was looking at a turnkey opportunity in Texas and the wholesaler said "man the tenant pays everything." I couldn't believe it.  I chalked that up comment up to the inflated cap rates he was pushing but if that's common in Texas, that's interesting.  

[Travis Scribner]

As a landlord, you can, in your lease, add a base charge for utilities you pay for. A lot of property management companies in St. Louis pass on water/sewer charges to tenants in a monthly fee on top of their rent. Obviously, this does not fluctuate with usage, but does offer an additional income to offset water/sewer bills. In St. Louis county, MSD (Sewer) is required to stay in the owners name, and CANNOT be put in the tenants name. So, the PM company often passes along the average cost (15-25$ a month). This can help increase your ROI.

Also, with multiplexes, you can 'sub meter' at your own cost. A knowledgeable tech can install a water meter at the main branch to each unit to see who uses what amount of water. The downfall of this is that you are responsible for reading the meter. The water company would have no ownership or right to read these, which can be taxing to send a tech out every month to read. Same if you have a master electric, you can meter the main line into each units main panel, but the install alone can be every expensive, and once again, would be your responsibility to monitor. We have spoken to the utility companies here in St. Louis, and we have gotten them to agree to split a main meter into multiple meters at the owners cost, because they make more money on a per account charge. Is the initial investment worth it? Thats up to you to run the numbers.

Lots of info to think about! Feel free to ask me anything if you would like any more information.

Travis Scribner

[Jake I.]

@Shawn Ackerman Yes for sure. We'll see what Seth has to say, but just from my experience as a renter I've always had to pay water. However, I haven't lived in many different areas of town so it could vary. Not sure if it's a Texas thing or not.

[Jake I.]

@Travis Scribner Interesting, Travis. I'm curious, do those base charge utility fees just come in the lease and are not advertised as an addition to the rent?

Also, to your point about multi-plexes, is there a common practice in which there is one meter but water bills can be split by all units equally? Like it's understood that the tenant's bill won't be a direct reflection of their use, but they know that it will be split or just a flat bill every month that I take in with rent? I could be mistaken, and I could possibly find out, but I think I remember when I lived in a large complex that we received a water bill in the mail, but we paid it to the leasing office as an addition to our rental dues. Sound like something you may have seen before?

[Travis Scribner]

Jake,

Yes. With prior management companies I have worked for, we gave them a 'utility disclosure form' with their application packet stating who pays for what and how much (If its a flat fee).

For example, this form would read:

Gas: Laclede Gas, 123 main st. Phone XXX-XXXX, tenant responsibility

Water: Missouri American Water: etc, etc, tenant responsibility

Sewer: MSD, etc, etc, Owner pays, tenant portion responsibility: $15.00 month

etc for any other utility, internet, phone, etc.

This sheet provides several points, one is to inform the tenant who pays for what, another is who their provider is, so if they want phone, and its an AT&T area, they know who to call to get service, also helps them to get utilities switched into their name before move in. All PM companies require confirmation of utilities being switched before giving keys out. With any utilities the tenant pays back to the PM or owner, the amount is pro-rated for the move in month, and set to the regular amount for the rest of the lease. It is also spelled out in the lease, so if the account goes into eviction, it's a legitimate, agreed upon charge by the tenant/landlord, and will (Generally) stand up in court. (Some liberal judges may toss em out, same with late fees, but that's a story for another day)

With a lot of our 4 family properties on south city St. Louis, we take an average of the water usage (Generally industry average, rather then building, because each lease would have a different amount charged, and that can be an accounting nightmare) So, if we manage 30 4 plexes, and the average per building water cost is $100 a month, we set a standard of $25 a month additional charge to the tenant. Same with Sewer.

Another company I worked for had a LARGE apartment complex (600+ units) and they actually owned the electric in the complex. The high wires, poles, meters, everything. They purchased electric at a 'bulk' rate at a master meter going into the property, and we had a tech read each meter every month and sent out bills for electric at the retail rate. So, yes, it is done, and is being done. :)

Keep the questions coming! Happy to educate!

Travis Scribner

[Jeff Wells]

Just to throw out a caveat, we own several short-term, executive-style rental properties in San Antonio, and for those, we include utilities, but we also write a utility allowance into the lease.  So, for example, we cover $200 in utilities, then the tenant pays anything over that.  The utilities stay in our company's name and we invoice the tenant accordingly. 

[Bryan Blancke]

In my experience as a tenant in MI, it is usually required to put all the utilities in the tenants name. 

From listing to the podcasts, it seems most landlords being interviewed favor tenants paying utilities. Many of whom have gone out of their way to pay for separating the meters in small apartment complexes or multifamily investments. It will cut down on waste significantly. However, there have been some podcast stories of paying for separate meters to backfire. Depending on the market, you need to see what your competition is doing. If you are the only owner who doesn't wrap utilities into the rents, your customers will leave you for the competition. Also, in some cases where the cost to do the separate metering is higher than usual due to the the existing infrastructure, some podcast guests choose not to separate the meters on some investments. Generally, if you can separate, and people wouldn't put up a fight about paying the utilities, I would definitely make the tenants handle those.

[Maggie L.]

I've lived a few different places (Wisconsin, New Jersey, Missouri) and seen different norms when it comes to utilities.  When I've rented any place that didn't cover all utilities I've only paid gas and electric (besides extras like internet) but had friends with trash or water fees.  

As a landlord in St Louis I over trash, water, and sewer for my tenants.  Part of that is because water is a flat fee based on "fixtures" - not everywhere in the City but definitely in the properties that I own.  There are many idiosyncrasies to St Louis billing, some of which have already come up on this thread, and it also seems easier for everyone if utilities stay in the same name.   I know some landlords who keep all the utilities in their name and bill their tenants; that way you don't risk someone canceling the utilities and leaving the pipes to burst in the winter.  Personally, I think it's best to include most utilities rather than adding "fees" so tenants don't feel like you're advertising one rent but charging something higher.

When I do see all utilities (electric, gas) included it tends to be in things like executive rentals, or smaller 1 bed or studio apartments.  Not knowing the individual buildings I can't say if it's more ease of management or lack of separate meters.  The opposite case - tenant pays all - I've generally noted more in single family home rentals.  There are definitely norms in an area, but then there are always exceptions too.

[Chris Dawson]

@Jake I., I have always had the tenant pay all utilities for all of the single family homes in Kansas and Missouri that I have either owned or managed,  This would exclude Sect 8 or other types of government subsidized rent situations.  With these, the owner often does have to pay the utilities; but it depends on the specific contract.

As for multi family, it depends on how the utilities are set up and the type of tenants you have.  I owned a 6-plex where there were separate meters for gas and electric, but only one water meter, so I paid the water bill but made the tenants pay their own gas and electric.  Sometimes a landlord will have to pay the utilities simply because the type of tenants the property attracts are the kind that always have outstanding utility bills and simply can't get the utilities turned on in their own name.

Something else I would stress.... Know your utility policies!  By this I mean you need to understand your utility company's policies for when tenants move in and out with unpaid bills.  All utility companies operate differently based on local laws.  To give you an example, anybody who has invested in Kansas City will most likely have a horror story to share about the KC Water Department.  They have a policy of attaching any outstanding tenant water bills to the property itself so that your next tenant will not be able to turn the water on until this bill is paid, which means the owner gets stuck paying for the past tenant's outstanding water bill!  Absolutely crazy!  Last I heard, the KC Water Dept was being sued but I don't know if anything has been changed yet.  @Kim Tucker was heavily involved with this issue and would have more details, if anybody wants to know more about this.

[JD Martin]

If you own anything but multi-family housing I would strongly recommend you have the tenants be responsible for utilities, regardless of whether it is in your name or their name (and I would highly recommend it be in their name if your area allows such). It has been proven that utility consumption is much better scrutinized when it is a controllable charge than when there is no connection between consumption and charges, as would be the case when you include utilities or when customers are billed a flat rate regardless of consumption. If you are in an area/state where the utility can legally hold the property owner responsible, I would still have the tenants responsible for utilities but have a copy of all charges sent to you as well - or, you keep the utilities in your name and bill the tenant directly (not recommended but an option). The landlords I know that complain about the cost of utilities always include it in the rent and then can't understand why their water and gas bills are double what they run at my units, or my personal home for that matter. People waste that for which they don't pay. Sometimes they waste that for which they do pay, but not as likely. I see people with included utilities walking around in the dead of winter in the house with the heat on 78 and wearing shorts. 

[Daria B.]

Originally posted by @Josh Nicolson:

For me it completely depends on how the building is built. If it's seperately metered I make the tenants pay. If it's master metered, I pay the utility. 

Even in Arizona I buy properties with master water meters and I foot the bill. However, I stay away from properties with master electric meters. If I do buy it, I spend the money to split the master electric meter into individual meters. 

Seperately metered utilities makes life more predictable. And when you split the meters, tenants are more responsible, and everyone involved saves money (tenant and landlord alike).

If I do buy it, I spend the money to split the master electric meter into individual meters.

I'm looking at a duplex now that the owner is paying water because there is only one meter. I called the city to find out cost to install another meter so that the duplex can be split and have the tenants pay.

In your experience did you find you had to really explain to the tenant why you were doing this. Obvisously, to have the tenant bare the cost since they are the ones using the resources but if they weren't paying and then have to pay I'm sure they question this extra expense. 

[Daria B.]

Originally posted by @Don B.:

What do you think it would cost to separate a master electrical system, into separate for a duplex?

 You might want to all your utility company they can tell you better based on giving them the location. I live in Gainesville Fl and I called mine and they quoted $600 to install a new water meter for a duplex. They did say that the inside needed to be determined as to whether  the water line was already split - if not then i would have to get a plumber involved to separate the water inside the duplex to feed to the outside that would connect to the separate meters.

[Kyle J.]

I only own SFR houses and have the tenants pay all the utilities. However, even with the tenants paying all the utilities, there are still times when an owner may incur an expense for utilities (i.e. when the house is vacant during a turnover; or some of the utilities - like garbage - are built into the county property tax bill; etc). It can vary city to city, and even neighborhood to neighborhood in some of the areas I invest in.

[Kim Tucker]

@Chris Dawson, the lawsuit against the city was won, but only for the named parties.  They didn't change their act and are still reverting the bills if unpaid to the landlords name, often with out telling the landlord until the tenant moves out and new tenant can't get service or when it gets high enough for the water department to then sue the property owner for the bills.  Plus other issues.

The LandlordLegalFund is working with us as well as the Missouri Board of Realtors to get information from properties owners to again attempt to work with the city to get policies changed.  There is also a bill that has been discussed from Rep Gary Cross from Lee's Summit to change state law so that city owned municipalities cannot bill the landlord for the tenants unpaid utility bills, but it has not gone anywhere yet.

If you have issues like this in your city - seek out the local real estate investor association, they may have an avenue for you take action and make your voices heard.  We need to band together in our local cities to stop bad practices or prevent new issues - for example in Overland Park KS, they are working to make a more strict landlord inspection policy and charge a registration fee for every property to pay for the inspections.  If landlords don't stand up and make their voices heard in a constructive manner they will get left behind.