New owner wants to change old lease

5 Replies

Hey BPers! Just joined and first time posting.

I am fairly new to investing and am looking at purchasing a duplex that is bank owned. Current, long-term tenants in place. One issue I don't love about the current setup: one electrical service entrance/meter and the current owner (bank) pays all utilities for both tenants. I wouldn't want to come in and rock the boat too much, but am thinking of potential options to assist in cash flow. Utilities are approximately $350/month. Considering 1) modifying agreement to say landlord will pay first, say, $200 and the tenants split anything over this amount, or 2) exploring adding second meter (don't know cost on this/don't know current wiring setup, or 3) raising rent (which is low) to absorb some of the cost of utilities.

Anyone dealt with this type of situation or something else where you've had to come in and be the "bad guy?" Any creative or alternative ideas here? Any insight is greatly appreciated. Thanks!

As a tenant I would object to this ,  if tenant  in unit 1 is a single male living alone , and tenant in unit 2 is a single mother with 2 kids . By splitting the difference , the tenant in unit 1 is subsidizing tenant 2 .  A single guy will generally use less electric than a family of 3 

I think it depends on the standard in your area. Are other landlords in the neighborhood paying utilities?

Personally, I’m not a fan of paying any utilities. We pay water and sewer in 2 of our fouplexes and I think it encourages waste. When the faucets leak or toilets valves run, they never tell us. However, paying the water is the standard in our neighborhood and getting separate meters installed is cost prohibitive. We raised the rent on most of the units.

If there’s a way to have separate meters installed, I would go that route.

Adding a second meter is not cheap but you will be much happier in the end.

If you can't / won't add a second meter, contact the electric company and ask them if they can provide you an average use per unit that you can use as a baseline.  To be fair, you have to adjust the charges based on the occupants like @Matthew Paul stated. It should vary based on the number of occupants, appliances, etc. You'll never get it correct but you can get pretty close.

I've also implemented a maximum like @Matthew T Fox . I had two units of equal size on one meter. I called the utility company and learned the average bill for the past year was $200 a month. I told each tenant that I would cover the first $200. Anything above that amount would be divided between them and added to their monthly charge. This kept things under control.

Don't worry about upsetting the tenants. It's a business, not a friendship. Figure out something fair and then give them 30 - 60 days notice - in writing - to prepare for the change. 

Install a second meter and change terms to tenant pays utilities.
If this is not cost effective raise the rent enough to cover the cost of utilities.

Do not get paralysis because you do not want to be the bad guy. If you raise the rent to the fair market value you are not being a bad guy but a fair guy. Fair market is fair.

You bought an investment property and not a social club. You are not responsible for how the tenant feels when comparing your fair market rent versus the ridiculously low rent the former owner gave them. By the way, there is a reason they sold to you and it could be that they were not making money.

And don't hold the rent down for fear of tenants leaving. You are in this for the long haul so fix the issue now.

I would see about the cost to get another meter or to investigate some of the non utility sub metering options that are available, you may find the House is wired in a way that makes it impossible to sub meter.

Either way, when the leases come due, renew them on your own paper, reset the whole expectations.

I would not do arbitrary things like first 200 then split it.

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