Pricing rent to include utilities

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Pricing rent to include utilities

Carley M.
Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes

I have a 4-unit building in Buffalo, NY. I am in the process of renting one of the units. The applicant is in a program where she receives a rent stipend up to $960.  Rent on the unit is only $700. The stipend doesn't cover her utilities but the stipend will pay a higher rent amount (up to the $960) if the rent includes utilities. The apartment is only 850 square feet and is well insulated, gas heat.  My thought was to get the average of the bills for that apartment, up it 50% for usage/cushion/profit.

I understand why this is not an ideal model for the other units, but in this case I think I can cover the costs easily with a cushion and even profit because her stipend is higher.

Has anyone worked with pricing models for this? How would you determine the rent amount? Would you be comfortable charging 150% of the average bills if this was your unit?

Thanks in advance!

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Mike CumbieBusiness Member
REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
9y

Hi @Carley M.

The biggest problem with something like that in our area is when the Lake Effect snow comes through and they have the heat to 85 degrees and 2 windows open because the breeze feels better. I've even seen it where one tenant told another one that their rent included electricity... who told another tenant. There were extension cords running to the other apartments..... I kid you not.

Just my thoughts and good luck in whatever you decide!

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    Hi @Carley M.

    The biggest problem with something like that in our area is when the Lake Effect snow comes through and they have the heat to 85 degrees and 2 windows open because the breeze feels better. I've even seen it where one tenant told another one that their rent included electricity... who told another tenant. There were extension cords running to the other apartments..... I kid you not.

    Just my thoughts and good luck in whatever you decide!

    2Reply
  • Eddie Memphis
    Investor · Englewood, CO · Member since 2015 · 158 posts · 140 votes
    9y

    Always make them pay their own bills. 

    1Reply
  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @Mike Cumbie The average electric bill during the past 2 years was $45 and the average gas bill for the same period is $35.  The highest gas (heating) bill was $60.  I think I would be comfortable with $850/$875 to include utilities (where rent without is $700). I also need to be able to justify the pricing difference between this unit and the other units in case someone questions it, so I don't want to be unreasonable and ask for $900.

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    Oh another thing I thought about is "Fair housing".

    If there are tenants in any of the protected classes that you are "including electricity" you "could" end up with someone claiming discrimination against you. "She did it for (insert protected class) but not for me and I have to pay out of pocket because I am a (insert protected class)!

    Just another thought and good luck on whatever you decide!

    1Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Carley M. It sounds like in this particular case, you might be right about including utilities, but don't do it if you're not sure it's going to make you more money. That means going as high as you can. I think $900 is fine. If you only go up to cover a little more than the average bill, you aren't really getting any benefit, and you are taking the risk that the tenant overuses utilities, costing you money.

    If you are ever questioned about the difference, the easy answer for why the different in rent is that utilities are included. That is a huge luxury. You need to protect yourself from the tenants @Mike Cumbie mentions, who might run up a $200 monthly bill, so you have to overcharge for utilities. 

    Another thought: are your $700 units at market? Can you justify some of the increase as market rate?

    1Reply
  • Jim Adrian
    Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
    9y

    @Carley M.

    Why not install sub-metering and let each tenant pay there own utilities.  This will save your headaches later.  Sometimes its better to take the upfront hit to save on the back end.

    Worst case after each unit pays the % they used the following month after reading meters and figuring out the % they used.  This is defendable and keeps cost down.

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  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @Kevin Siedlecki This apartment has 150 sq ft more than the other unit I just rented at $700, so yes, I could explain some of the difference in market rate.

    Regarding fair housing complaints, I don't think that will be an issue in this situation (there are other factors here) but I appreciate you looking out for me @Mike Cumbie

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  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @Jim Adrian they already are sub-metered.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    If they are already sub metered do not include utilities in the rent. That is contrary to every know best operations for a rental.

    Are you that desperate for a tenant that you are prepared to jeopardise the rest of your units as well. Legally you must treat every tenant equally otherwise you will risk legal action through discrimination. If they all demand utilities be included legally you could be forced to comply but may not legally be allowed to raise their rents to do so. You need to step up your business practices to a professional level before you consider making any more mistakes. There is absolutely no reason for what you are considering doing. 

    Do not do it.

    1Reply
  • Julie MarquezPro Member
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    9y

    @Carley M. This is not particularly ideal (especially not for large scale), but I pay the bills for one of my SFR. Then I just pass on the bills to the tenants and he pays me back with the rent each month. The email correspondence and figuring out each month's varying final rent bill takes me about 15 minutes a month.

    1Reply
  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @Thomas S. - As I stated earlier, there isn't a discrimination issue here, nor is there a potential for one. There are other factors here that you simply aren't aware of that makes that a non-issue. My consideration of this is purely financial. I have an opportunity to make more money by offering the unit with utilities - and have the ability to build in enough of a cushion to cover even the highest utility estimates. As a forensic CPA working as the financial monitor for low income housing in Buffalo, I have the professional experience necessary to be able to analyze the numbers so I am very comfortable with making the assessment.  My question wasn't "do you think this is a good idea" because I have already considered the options and have determined that if the pricing is done correctly, then this is a valid financial decision. My question was whether or not anyone had looked at pricing models for this or, more generally, if other owners (with experience in this model) agreed that pricing of 150% of utilities was sufficient.  

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  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    I include all utilities. its easier for me and the tenants. I usually charge 3x what I think utilities will be

    1Reply
  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @David Zheng in your experience have you had the bills exceed 2x?

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  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    I have not. 3x  also comes from me having to deal with utility companies and them not have to set up any accounts, worry about paying bills etc. so there's a premium in that service. I also only deal with students so they aren't home 75% the time :) 

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  • Jim Adrian
    Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
    9y

    Then run the numbers over a years worth of  data of high to low usage and see what the difference is.  Then figure out what number makes you happy $$ wise.  Maybe its adding 25% to the highest bill or something like that. You could treat this as a utility handling fee where you are able to mark up the bills by a percentage.  Kinda sounds like price gouging to me or don't get too greedy. 

    In order to be defendable, you must use data over a 1 year period.  Create a mathematical formula.   Let excel be your friend!   Contastly keep your data up to date.  Search for other precedence to back your data.   

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  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Carley M. These types of programs are rabbit holes and will end up costing you money in the long run for a variety of reasons.

    How is the tenant pool? Do you have other options?

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    How desperate are you for a tenant? Because this sounds like desperation. Keep in mind that people that cannot cover any of their own costs often become your worst nightmare. How easy is it where you live to evict a non-payer (i.e., she loses/becomes ineligible for Section 8)? 

    For me, a tenant that cannot even afford to cover their own utilities doesn't need to be occupying any of my units. 

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  • Carley M.
    OP
    Investor · Buffalo, NY · Member since 2016 · 100 posts · 71 votes
    9y

    @Michael Noto @JD Martin The tenant pool for the property is good. The applicant is a student and asked me to consider including utilities so that the stipend she receives would cover those bills as well. Jd you bring up a good point about her losing her stipend. I hadn't thought about that, but it certainly would impact my decision if it's not guaranteed for the term of the lease. That would make me less likely to be willing to make the accommodation.

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  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    9y

    This seems super easy to me.  Rent is $960 per month, utilities included.  The tenant doesn't care what the rent is because they aren't paying it anyway.  Get the full amount and you should be easily covered.  Seems to me like everyone is over analyzing this one.

    1Reply
  • Mattie Covatch
    New York City, NY · Member since 2012 · 77 posts · 11 votes
    9y
    Originally posted by @Eddie Memphis:

    Always make them pay their own bills. 

     This.

    A few hundred in a stipend isn't worth chancing paying their utilities.

    "Utilities paid" generally gets taken advantage of. They'll run the AC down to 60 degrees in a 100 degree summer, and turn the heat up to 80 degrees in the freezing winter. A "financial model" of normal utilities does no good when the tenant takes advantage of the unlimited utilities and knows they don't have to pay the utilities no matter how much they cost.  

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