Landlords: Should I charge for utilities?

Question

Hello BP members,

I am diving into the numbers for some potential deals, and I am looking into whether I should charge for electric/utilities. Currently, my CoC return for year one is a little over 2.4%, with a conservative growth rate @3% given the area (west philly, gentrifying fast). My IRR, with utilities, comes out to about 12%. However, when I remove utility cost (thus charging tenants) CoC jumps to over 8% in the first year, and IRR over 20%.

So my question is, do I charge for utilities or build them into the rent? Understandably my numbers may be a bit skewed, as I did not adjust rent for utilities if I do not charge the tenants. I just wanted to be conservative.

Also, does it matter that I am in low income? Does this make one way better than the other?

Thanks!

Kevin M. · Answer

Pros and cons to each. We typically advise owners to push as many utilities into the tenants name as possible. As @Jacob Sampson mentioned, this allows you to advertise the property at the lower number but still not be out-of-pocket for these costs. Make them take over electric, gas, internet. As a side benefit, if a service shuts off it's not your fault and the tenant needs to work with the provider to resolve.

Water typically has to remain in the name of the owner. If it's not separately metered by unit, owner should pay this entire bill and build the cost into rent. You can get into trouble if you split up water bills among tenants with no control over use. You also have to be careful about billing tenants for water use because there are strict laws regarding resale of utility services. Avoid this if possible.

Kenny Dahill · Answer

@Brett Stander, a 2.4% COC return seems pretty low.  You could invest that money into the stock market and make more.

To answer your question regarding utilities: when possible always have the tenants pay directly.

• Less Risk: When tenants pay for their own usage, they use less.  There's a direct correlation between usage and pay.
• Easier to Manage:  Utilities is one more headache when managing.  Placing it on the tenant alleviates a task.
• Calculating Splits:  You will constantly calculate the fair splits.

How many units is this property?  Is it metered individually already?  If not, that might dictate which utilities you can have tenants pay.

Nicole Heasley Beitenman · Answer

I agree. It also prevents tenants complaining about being overcharged. If the city doesn't allow the tenant to put utilities in their name (for example, my Cleveland, OH tenants can't put the water bill in their name because it stays with the property), I invoice them and attach the bill so they know they're being charged for their usage.

Mayer M. · Answer

@Brett Stander

Charge for utilities

Jacob Sampson · Answer

I prefer to charge for utilities, it allows you to advertise the rent as lower.

Landlords: Should I charge for utilities?

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