Tenants vs Owner paying for heating oil

[Tyrel Ferris]

We have detached 4 Plex in Alaska. We purchased the beginning of the year. The leases are month to month, and it included heating oil when we bought the property. 

How can we go about having the tenants pay for their own heating oil? 

They're not even trying to conserve it. It's about $1500-$2000 a month because they're just burning it like crazy since we pay for it.

What's the best way to tell them they're going to have to start paying for it themselves? 

[Charles Carillo]

@Tyrel Ferris

Do you have natural gas at the property? When I have had oil in rentals; we would install gas furnaces/boilers for each unit with separate meters. This is the best however; it is expensive but, you will be saving money every month. In this scenario, you would have all of the gas bills in your name until the leases come up for renewal. At that time, you can require tenants in the new lease to pay their gas (heating) themselves. If they don't like it, they can move out.

[Bruce Woodruff]

You stand the risk of having them run out of money and not heat enough or consistently. Pipes freeze etc.... Ask me how I know.

Maybe set a reasonable limit for each month (ask a PM company what is standard) and if they go over, they pay.....

[Nathan Gesner]

Quote from @Tyrel Ferris:

The Tenants are on a month-to-month lease, so you can change the terms of the lease with a 30-day notice.

I would really look at your lease and ensure it's solid. If you want a new one, BiggerPockets sells a Lease Agreement Package for $100 under the TOOLS menu up top. Written by investors, for investors, and attorney approved for each state.

Give Tenants a 30-day notice that you will require them to be responsible for utilities. 

HOW TO SHARE UTILITIES 101

You have a property with two or more units and the utility meters are shared. There are a few options.

1. Pay to separately meter the utility. This can be very expensive and is usually the worst choice to make because you can't justify the cost.

2. Charge the tenants a higher rent rate and include utilities with their rent. This is the simplest method, but it also means your tenants are more likely to abuse the utilities by leaving windows open with the heat or A/C running, leaving lights on, ignoring the toilet that constantly flushes on its own, etc.

3. Pay the bill yourself, then reimburse yourself by charging the tenants based on a formula. This takes a little more work, but it's the most fair and reduces the likelihood of tenants that squander utilities.

If you choose #2 or #3, there are considerations:

Start with an average. Use varies throughout the year. Heating costs go up in winter, as does electric due to the reduced natural light and people being indoors more. Electric can also spike in the summer with A/C. Contact the utility provider and get an historical average based on the last year of use. It won't be 100% accurate, but it will be close enough. I recommend you do this each year to adjust for utility increases and other variables. If your average heating bill is $150, you may not collect enough in the winter months when the bill reaches $225 but you'll collect extra in the summer when it drops to $65. If you base your tenant charges on the historical average, you should come very close to collecting the entire amount over a one-year period.

Charge a higher rate. If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility. If the bill is $100 a month split between four units, increase it to $120 and charge each tenant $30.

How to calculate charges. Don't make it harder than it has to be. If you have four 2bed/1bath units with the same appliances, split it four ways and call it a day. You can make minor adjustments based on the type of appliances (dishwasher, clothes washer and dryer, air conditioning, etc.) and the size of the rental. If Apartment A is a 2bed/1bath with washer/dryer and Apartment B is a 1bed/1bath with no washer/dryer, Apartment A should pay a higher rate. Another option is to split the cost based on the number of occupants in each unit but this also means you'll need to adjust the charges as tenants move in/out, so it requires more work and I wouldn't recommend it. I recommend a simple spreadsheet to check your math and it will make it simple to adjust each year.

End the complaints. Tenants may complain about your method of calculating how much each unit pays. They think it's unfair because they only shower once a week but they can hear the upstairs neighbor showering twice a day. You can put an end to this by showing them an actual utility bill. Why? Because a large percentage of the charges are base fees that do not change based on use!

I just looked at a utility bill and it has a total charge of $184.12 but $116.50 is from base fees! If I divide this bill by four units, each tenant would pay $46.03. If they were separately metered, each tenant would pay the $116.50 base fees and their individual use, which would be 3x higher than what they pay when sharing a meter.

There are a lot of options out there, but don't make it more complicated than it needs to be. Tenants actually save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.