How do you separate water, sewer, trash?

Question

Hello real-estate community,

I am purchasing a conversion 4 unit this Friday in Wisconsin Dells, WI. The current landlord pays all utilities. I've heard some ideas on the BiggerPockets podcast on how to separate those utilities out to the tenants. Can anyone share some ideas on how to split up a big old house so that the tenants share their fair portion of the utilities? There is one furnace so I don't think there is any option for splitting this up. The water/sewer/trash on the other hand might be something I could split up.

Thanks,

Troy

Corina Eufinger · Answer

@Mitch Kennedy That is an unconventional approach.  Years ago (more like a 2 decades ago) there was an investor in Brown Co I believe that got a good dressing down by the judge the for that. Especially because the in that particular case the 3 bedroom was rented by a couple while the 2 bedroom was rented by a family of 4.  If you are going to divide it mathematically the preferred method is half assuming equal units (both being 2/1 or whatever).  Secondary method is dividing it up by number of occupants per unit. This is the route many people go when they have dissimilar units like a 3 bedroom and 2 bedroom or other combination.

@Troy Froistad RUBS are good however expensive.  How expensive it is to put in depends on the schematics of the plumbing.  It never hurts to get a quote from a plumber for putting one in the property then contact a company willing to "manage" the billing.  You may find it difficult locating a company that will do it.  When I was searching 3.5 years ago it wasn't as easy as I thought it might be.  I ran into a lot of companies that had minimum number of unit requirements (8+), didn't cover Wisco, etc.  Since you are purchasing that property I will point out that if the tenants have existing leases with a set term (meaning they aren't month-to-month) you cannot switch responsibility for utilities until the current lease is expired and a new one is entered into.  You are bound to all existing lease terms including utility responsibility until the current one expires and a new one is entered into.  If they are M:M, it is slightly easier.  Let's say you close on the June 15, you can send a new rental agreement (M:M or not dealer's choice) that will be effective August 1 that makes them responsible for utilities.  However the lease must have in it specifically how the billing will occur.  Is it divided up, what's the math? Is it being serviced by a 3rd party?  How frequent is the billing (if its not billed directly by a municipality).

Louie Gabriel · Answer

One tip--if you end up including in the rent, make sure you've looked at a few years of monthly charges so you're familiar with how it may fluctuate and come up with the right # the first time.

Jimmy Chao · Answer

Metering of utilities as mentioned above is certainly one issue relevant to this question. However, there is another more pertinent one.

Is the utility bill lien-able against your property? This will vary from area to area for different utilities. Usually this has to do with whether the utility is provided by a government entity. In my area sewer is lien-able unless you have a septic system of course.

Garbage is SOMETIMES lien-able in my area. In some municipalities they charge a flat fee per year, if it isn't paid a lien can be filed. Some municipalities include it with the taxes. Some others sell special bags or stickers to put on bags. Still others require the occupant to hire a private garbage hauler.

If a utility is lien-able, it makes more sense for a landlord to pay the bill directly rather than trust or have to verify that the tenant is paying it. If the bill goes unpaid it attaches to the property and doesn't follow the tenant. So, that is why in many cases landlords pay some utilities.

As a side note, I have seen many utilities provided by government entities. So, this happens a lot and varies from area to area a lot. I have seen water, sewer, electricity, and garbage all provided by government entities. I have not seen natural gas.

Louie Gabriel · Answer

Some Landlords find it easier to pay for these utilities. If tenants in your area are used to the provision it may be their preference. You can increase rent to off set difference. An example I owned a rental out of state, tenant fell behind on lease and I had them leave. I was planning to sell property and went to get utilities switched to my name and found the tenant had utilities shut off for gas and water due to not paying. I also had to pay the fee to have water turned back on. Unit had gas for furnace and was middle of winter so I was trying to get the house heat on to prevent pipes from freezing. Tenant was using an electric space heater. Had a rough time bc you need to let the gas company in house to inspect for gas leaks after turned on. Also had to fight city utility over me being responsible for tenant's water bill. You can stream line between tenants if these utilities stay in your name, and you can keep an eye on usage. many utilities require a deposit so tenants may be discouraged having so many deposits to pay up front. Just personal experience.

Patrick M. · Answer

Look at your market. I get Great prospects that come from landlords who implement RUBS. It is a losing proposition for young professionals and it encourages others to be wasteful.

Your buying it from a guy who included it- see where your numbers are. I made out HUGE by implementing conservation. It is amazing the amount of water new "personal showerheads" save without compromising performance, toilets too. Make sure you know your water heaters so they are set right so water isn't run long to get hot. Put a cut-off on outside bibs that only you can access. These are some of the things I did. Did the same for heat that I provide. Winner winner chicken dinner....And then the young, never home, "no wear and tear" professionals come knocking! So happy to live in a place that isn't set up like some socialism experiment.

Thing of beauty.

Justin Hoggatt · Answer

A RUBS process is legal and acceptable (in as many states I can think of).  Make sure you spell that out in the lease on what a ratio utility billing system is.  It's not a science and can be calculated however you want.  I utilize the RUBS in Appfolio that will do it for you after you set the parameters.  I had also previously done a spreadsheet that was based on occupancy (# of tenants) and square footage for the ratio items and then split equally between each unit for the trash.  The occupancy covered the water and electric in my mind, and the square footage covered the heating and gas.  Of course, this specific building is setup different than many others as well, so change it how you see fit.

Mitch Kennedy · Answer

Question for folks following this: When I was in college in WI I lived in a duplex that wasn't separately metered. Instead of the landlord paying utilities, they would take the total utility bill, divide it by the total # of bedrooms (7) and add each portion to the applicable unit's rent. The upstairs, a 3 bedroom, would pay for 3/7 of the bill and the downstairs unit would pay for 4/7 of the bill, being a 4 bedroom. As I learn more about REI and utilities, I've always wondered if this was legal and a normal process investors use in WI.

Nathan Gesner · Answer

Get an average for the utilities from the past year and use that as a baseline. Then split the cost among the rentals based on size, number of occupants, amenities (washer/dryer, dishwasher, etc), and other factors.

For example, average utility is $200 per month. Some months are higher, some are lower, but the average should generally balance out over the year. I have a 2bed/1bath and a 1bed/1bath. They both have washer/dryer and dishwasher. The 1bed unit is occupied by one person and the 2bed unit is occupied by a husband/wife and one toddler. I decided to charge the family 60% ($120) and 40% ($80) to the single person. Since the majority of any utility bill is the base fees and I'm only charged for one base fee instead of two, these tenants are paying less than they would if they had their own meter.

It's not an exact science, but it works well and the tenants are happy.

Brad Hammond · Answer

Hey @Troy Froistad, I was talking to a plumber about this on Saturday actually. He said to submeter the water, it cost about $18,000 to split the line and add another meter on there, plus all the city taxes.  There is something you can add to the line but it might not work depending on how your pipes are laid out.

You are probably better off just doing a RUB where you charge your tenants a set amount per month extra on top of their rent to account for water/sewer & trash.

How do you separate water, sewer, trash?

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