I'm currently looking at a duplex to buy and as of right now the current landlord is paying ALL utilities. Apparently the current owner bought it as part of a package deal and just kept it the same as when they purchased it, but as you could imagine paying all the bills is cutting into the cash-flow immensely. My question is if you were to buy the property would you immediately change it to where they pay utilities or would you keep it the same. Apparently the tenements are long term.
If the lease states the landlord covers the utilities you must honor that until it expires. If it’s a month to month lease and I wanted to change that I would give them 60 days notice. However, you should look at your states laws to see what they require for amending a month to month lease.
Also how will you separate the utilities? Are they already separately metered? If not you will have to either pay to have it done or use some sort of back billing system. Personally I would want separate meters. If you choose to separate everything be sure to factor that cost into you purchase price it can be a big expense.
You cannot change anything that is in the current lease until it expires. Another consideration is what rents are in relation to market. Tenants may be paying a premium to get free utilities, in which case your rents may be overpriced when compared to other units paying their own utilities.
One of the recent bigger pockets podcasts covered this exact situation- it was 275: Early Retirement at age 35 with Bryce Stewart. I really liked his response. (around minute 39)
There are pros and cons to utilities. PRO: You can raise the rent to cover the high average of utilities. PRO: you never have to worry about utilities being cut off in winter months potentially damaging your property. PRO: some tenants prefer paid utilities. PRO: you never have to deal with tenants transferring in and out of their name, or cutting off utilities instead of transferring back to you. CON: tenants will use utilities as if they are free and not conserve. CON: It sort of cuts into cash flow unless you raise rents to accommodate high usage.
Thanks for everyone who responded, i like reading everyone's input because not everyone thinks the same. In this situation for said duplex, the rents are 750 one side and 700 for the other yet the expenses range from 300 up to 500 in the winter months! The current rents on this place are currently a little bit higher compared to the surrounding area but not that high. Also the leases will be expiring in the upcoming months.
You have to honor whatever their lease states and I'd definitely make changes with the next lease renewal.