Passing Operating Expenses To Tenants?

Question

Hi All,

My question is in regards to operating costs (heat, snow removal, and landscaping) for multi-family buildings in New England, and if/how owners are passing these costs off to tenants.

Back story: My area is not serviced with natural gas and gets a lot of snow.  The properties also generally have large lawns.  Unlike single family rentals where the tenant will be responsible for all costs, small multi-family building owners are typically stuck. Building these costs into the numbers along with the standard considerations (MITI, management, vacancy, CapEx etc) can tip the scales and make finding deals difficult.

How do you offset and/or pass off these costs to your tenants of a multi-family in which you do not reside?

Multiple heating systems?

Build snow removal into rent?

Thanks!

Kyle

Kenneth Garrett · Answer

@Kyle Gautreau

Those expenses can eat into your cash flow.  You can add a document to cover utilities and maintenance items.  You can create a percentage based on unit square footage or number of occupants.  You will essentially send them a bill each month.

You will need to check with your state requirements to make sure this is not prohibited in your state and/or there are not limitations in doing so.

Be careful on how much the rent is plus utilities and maintenance.  This may lead you to higher rents versus your competition and you will have difficulty in finding quality tenants.

Check your market and see what other landlords are doing and what there rental prices are and if they include these items.  I think snow removal and lawn are typically the responsibility of the landlord in MF properties, but I like way you are trying to reduce your expenses.

Good Luck.

Daniel Reyes · Answer

Hi Kyle,

Thanks for posting!

I recommend verifying you are charging market rent. If the property is higher quality than the most appropriate neighboring sales comps, it may be viable to increase the rents accordingly. To be sure, the market will let you know if the rents being charged are too high. Generally speaking, all of these costs are budgeted and built into the underwriting of the deal before the purchase. This way you're committing to an investment with an informed calculation of the intended returns.  There may be a challenge in presenting these kinds of operational expenses down to the residents, as they may question "why is this on my bill?". In the underwriting stage, this would have already been vetted.

Good luck to you! Please feel free to reach out if I can provide you with anything else.

All the best,

Daniel Reyes

David Marshall · Answer

Hi Kyle,

Some landlords in the area are successful with passing off the heating bill to the tenants by installing K1 monitor heaters or electric ductless mini-split heat pumps when natural gas isn't in the street.

It will be more difficult to pass along the landscaping and snow removal. Some landlords will hire a tenant or provide them with discounted rent to take care of those items.

Feel free to p.m. me if you're interested in discussing this in depth.

Thomas S. · Answer

You simply calculate all expenses, establish a rental rate that will meet your cash flow requirements and move forward assuming that market rents are sufficient to meet those requirements. If markets rates are not high enough to include all your expenses then the property is over priced and will not cash flow. You do not purchase in that case.

In some markets the numbers do not work and investors are mainly relying on appreciation as a investment strategy understanding that they will be supplementing their tenants rent in hopes they have made a good investment. This is not a good strategy in regards to multi units since property value is primarily driven by market rents.

It is mandatory that each unit have sepearte meters for all utilities and that they be in the tennats name.

Add up all expenses plus debt repayment plus desired cash flow and you have your rental rate.

Mary M. · Answer

Charge market rent   Find out what your competition does and do similar.

But be careful of over charging - it will affect vacancies.