Best way to bundle utilities with an existing lease?

Question

Hey All,

I am currently managing a 4-plex for a friend which he just recently bought and inherited tenants.
Being fed by a single meter, The previous owner had been charging flat rent and then having them Venmo her an additional fee for the utilities once she paid them and divided it by 1/4th in order to divide it equally to the 4 tenants.

I’ve spoken with all tenants and they all agree that it’s an unnecessary hassle and are fully on board with bundling utilities with their rent into 1 single flat monthly payment.

What would be the best way to handle this? Can I have them sign an addendum to the current lease contract stating that they agree to have the flat fee bundled?

Bonus points if you have an addendum that you’re able to share!

Nathan Gesner · Answer

You can always change a contract if all parties agree in writing. Write up an addendum, have all parties sign, and provide everyone a copy of the final document.

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 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 fairest 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 electricity due to the reduced natural light and more people indoors. Electricity can also spike in the summer with A/C. Contact the utility provider and get a 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 annually 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 more complicated than it has to be. If you have four 2-bed/1-bath 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 2-bed/1-bath with a washer/dryer and Apartment B is a 1-bed/1-bath 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 can hear the upstairs neighbor showering twice daily. You can end 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 with 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 many options, but don't make it more complicated than it needs to be. Tenants save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.

Tenants actually save money when you split a utility bill. Why? Take a look at your bill. It's not uncommon for half the cost (or more) to be base fees. If you had four meters, each tenant would have to pay the base fees and their actual use. With a shared meter, they only pay 1/4 the base fee.

Laura Stayton · Answer

Not allowable to charge for utilities in Delaware if they aren't separately metered so make sure you check.  The workaround is a higher rent and utilities included and paid by you