Transferring Utility Costs – Opportunities and Challenges

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Rising utility costs are one of the many challenges we multifamily landlords have been facing in this “perfect storm” economic climate.  Landlords who traditionally paid for utilities are searching for ways to transfer those costs to tenants.

If your utility costs are worse in the winter, as they are here in New Hampshire, now is the time to look into a submetering or RUBS (ratio utility billing services) system.  Of course, any benefits from transferring utility costs will begin as soon as you implement the system.

This is a complicated topic and I’ll cover it over several weeks.

In my own little properties, all tenants pay separate electric, telephone and cable bills.  I actually thought this was true for pretty much all multis before I started reading.  I did not realize how many landlords actually pay the electric bills (I pay for water and sewer in both properties, gas in one, and oil in part of the other).  However, one thing is true no matter for every type of utility:

If the tenant is not paying for it, he has no reason to conserve it.

Knowing that many tenants tend to be irresponsible, it should be no surprise then that they can be very wasteful.  How many stories have you heard of tenants having open windows in the middle of the winter; or running air conditioners with windows open in the summer; or leaving water running out of a tap all day?  Those situations probably won’t happen if the tenant is paying for the heat, electricity and/or water.  And so what if they do?  They’re blowing their own money.

Conservation is one reason why cost transfer, unlike pretty much anything else that would benefit landlords, is actually popular with the government.  On the other hand, government officials are (reasonably) concerned that we’ll screw the tenants in the process of implementing cost transfer.  Therefore, there are legal pitfalls to cost transfer. You can avoid them by choosing a cost transfer partner who can either share or assume the liability, and by carefully researching your own local laws.  Google “utility submetering” or “utility RUBS” and you’ll find a lot of options.

Why use submetering?

Submetering bills according to the actual utility costs, which will be preferable to most tenants.  It also means that their conservation efforts will really pay off!  Certainly it’s fairer that a tenant who really limits her use of water should benefit more than a tenant who doesn’t.

The downside of submetering is that it requires the installation of submeters.  This seems like it would be a huge hassle, but it typically isn’t.  My buildings already allocate heating separately because each tenant has his own thermostat.  Thus, there is a separate line for each unit.

Water is more problematic because there is no central system to allocate it.  I’m not nearly as concerned about cost transfer for water and sewer, however; it’s much less expensive than heating for me.  However, water and sewer costs can be very high in relatively dry states out West.
Why use RUBS?

RUBS allocates utility costs by square footage.  Therefore, if one tenant has 600 square feet and one has 400 square feet, the first is going to pay 1.5 times as much as the second.  This is simpler than sub-metering, and you can probably manage the accounting yourself, rather than rely on an outside company.  Obviously, you will not need to have sub-meters installed.

RUBS’ biggest problem is that it is, well, fundamentally unfair.  It can also lead to disputes between tenants, which already take up far too much of our time.

The problem is simple.  Let’s suppose the building’s normal gas bill would be $200 for the month.  I have two tenants with equal size apartments.  Mary sets her thermostat to 65 degrees, closes her windows, and even puts up plastic window seals.  Joe sets his thermostat to 75 and opens his windows.  At the end of the month, Mary and Joe each get a gas bill for $100.  Mary, quite reasonably, feels like she’s being abused.  Mary and Joe are going to argue, and will probably take the argument to you.

On the whole, I prefer sub-metering.  I probably will not worry about sub-metering water, since as I mentioned, it’s not a major bill.  On the other hand, I paid $1400 for a single gas bill last year, and that can’t happen again.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.