What to do with non-separated utilities?

Question

I am looking to close on my first property in the next month and trying to finalize a few details.  The current leases do not go into much detail on how the current property manager handles non-separated utilities so I thought I would reach out to you all.

In the event that a property has utilities or services payable by the tenant but are not separately metered, what is the most efficient way to handle billing said tenants in regards to ease of self managing?  For instance, I thought about building the water bill into the rent payment, but I don't want tenants taking advantage, nor do I have any idea what the average bill might be at this point.  On the flip side, I would rather not have to send out an e-mail/bill splitting up the water charges per tenant every month.

Is there a better way? Let me know your tips and tricks!

Nathan Gesner · Answer

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.

Nathan Gesner · Answer

My default preference is to normalize the monthly bill. I can automate charges and the tenant can automate payments. It's a lot easier. I prefer easy over an exact accounting.

Tyler Wenzel · Answer

@Nathan Gesner Thanks for the reply! Your reply, in general, was gold.  A few things I took away from it:

1. K.I.S.S! - My thoughts exactly. It seems that sometimes, their just isn't a "better" way.  Great tip on just calling the utility companies to get an average from the past year, too.

2. I like your thoughts on breaking down the calculations per unit versus per tenant in the building. I hadn't thought of the pain in the butt it would be for everyone after, say, two people moved out, and three moved in. Thanks for that!

3. What you said under "End the complaints" was amazing. I will definitely keep that tip in my back pocket! VERY much appreciated!

One question I do have:  If the water bill doesn't come monthly, but instead once per quarter, how do you typically bill? Would you split it up and bill then or just build in an "average" in order to bill monthly? My only concern with billing quarterly is tenants not actually saving money for it when it comes.

Eliott Elias · Answer

Best thing you can do is eat the charge or charge a flat rate to each tenant no matter the usage.

What to do with non-separated utilities?

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