I am currently considering a 10 unit (5 duplexes) purchase where the current landlord is responsible for all utility bills and does not have a cap on usage written into any of the leases. Fortunately all 10 units have month to month leases and the deal will most likely close going into the winter months ( I am assuming this is an advantage)
In my Analysis, I have found that If I reduce rent to the same amount across all units & transfer the gas&electric utilities to the tenants while landlord is still responsible for water & sewer ( win-win), I can increase the CoC ROI by 11%. To get to the details, annually, I will lose about $5,760 on the top line but save $14k+ on expenses and increase cash flow by $7.8k+.
I would prefer to implement this on day 1 though I understand such changes could be a tricky dance with tenants who have gotten used to status quo.
I am wondering if anyone in the BP community has had a similar situation and has a few helpful nuggets to share.
I haven't had this experience, but instead of telling them that they need to pay for gas & electric, you could increase rent by the equivalent amount (or ease them into it over 2 years). Making them responsible for something that the landlord used to pay will feel like you're taking away a benefit, whereas charging more for rent is typical and reflects increasing costs over time. As tenants move out, you can charge the new tenants for gas & electric.
@John LaBanca Thanks for your suggestion. The rents are already significantly higher than the neighborhood average due to this tenant side benefit and I want to be able to predict my income fairly more accurately while reducing the risk & and associated stress.
Increasing the rent could provide some cushioning, however tenants can get +1 room on the market at the new price point and will most likely end up moving. Also, it does not insulate me from the risk of having an insane energy bill because 3 of the tenants had bad mooods all month long and paid no attention to regulating their energy consumption.
Meet with your tenants as soon as you buy the property. Have new leases ready for them to sign.
Introduce the new rent amounts and the change is utility responsibilities. Let them know that they have _______amount of days (I would think 7 would be sufficient) to move the utilities into their names. If they do not it is a violation of the lease. Make sure that keeping utilities on is in their lease as their responsibility.
Pull the band aid off quickly before they know you and begin to get comfortable enough to push back.
They know there will be changes when the building is sold so make the changes when they are expecting them.
@Tosin Oluwatoye . Presume you are inheriting these tenants coincident to buying the property.
You'll first need to determine the type of leases: Month-Month or longer term. Either way, you'll have to abide by the provisions of the current lease(s) (all bills paid) until the current lease(s) expire.
Once the lease(s) expire, you can sign new leases incorporating whatever provisions you want and tenant(s) are willing to accept.
I've had this and it's not difficult. Contact the tenants on Day 1 and introduce yourself as the new owner. Provide them with contact information, payment instructions, etc. I would also include a short statement that you will require them all to sign a new lease and set up their own utility accounts for gas and electric.
Keep in mind, this sounds like a great idea but you need to confirm the market supports it. If the increase is too much, the tenants will all leave and you'll be losing far more than you had hoped to gain.
Another option is to keep utilities in your name and increase rent for the tenants to cover the expense. This is actually cheaper for everyone involved. The utility companies charge base fees for every account which means all ten tenants are paying those base fees and then paying for the actual use. With one Landlord account, you are charged the base fee once and then actual use so the overall charge is lower and you tenants save some money. Another benefit: you can usually put it on "budget billing" where the utility company will charge you the same amount every month so your tenants can pay the same amount every month and it's easier to budget. Another benefit: tenants don't have to establish their own utility accounts which means they won't have to pay the deposit required by most utility companies.
Thanks @Nathan G. I like the multiple perspectives. I'm currently gathering information on the area to determine how landlords typically price out (with/w-out utilities included). I will also check if the landlord is already taking advantage of having a singular energy account. That said, I believe reducing the rent by an amount that puts the rentals closer to the market is probably a better option. The current utilities expenses far outweighs the additional revenue being realized.
I will certainly post my eventual decision and lessons learned