Last year I had a gas bill for $1400. That was almost one-third of my entire rent for that property for the month. This year, however, I could get bills that are even higher. Meteorologists are predicting the coldest and snowiest winter for the Northeast in years.
In this property, I currently pay for heat (natural gas) and water/sewer. The water/sewer bills aren’t actually that high around here, although they are the lion’s share of utility costs for many property owners in Western states. Regardless of location, however, utility costs are killing landlords. They are rising much faster than inflation. Rents, on the other hand, are rising much more slowly than inflation, if at all.
We can reduce overall utility costs by performing energy audits and installing efficiency measures such as insulation and weather-stripping.
We also might be able to install temperature-limited thermostats. Google “landlord thermostat” and you’ll see a number of companies that make these useful devices. Please do check with your state and community government, however, as they typically set minimum temperatures for residential apartments. The local housing authority is a good place to start.
However, neither of these methods addresses the main problem of paying for tenant utilities. Since the tenants are not paying, they have no reason to conserve – and so they don’t. We are used to conserving in our own homes because our actions directly affect our costs. If we leave taps running or take long showers, we pay more for water. If we leave windows open or set our thermostats high in the winter, we pay more for heat.
The solution is to transfer those utility costs to the tenants. If we can arrange for them to pay heating, water and electric costs in a way that is transparent for them, and convenient for us, we’ll benefit by having more control and predictability of costs. The tenants will benefit by paying less overall for their combined heat and utilities. In a multifamily unit, the only practical solutions are sub-metering and RUBS.
The RUBS (ratio utility billing system) method involves allocating costs according to square footage of the various units, to the number of occupants in each unit, or a combination. You can do this by yourself using RUBS software or by hiring a vendor (Google “RUBS utility billing” to find a number of vendors).
I believe hiring a vendor makes more sense as it takes some of the workload off. The vendor will compute the bills and send them to your tenants. The payments are due to the vendor, who then pays you directly, typically deducting a flat fee.
Before you can implement RUBS, you must check to confirm that it is legal in your state and community. I know RUBS is not legal in Massachusetts or Mississippi – other states and cities place restrictions on how it can be used. Next, begin calculating the square footage per unit. Don’t forget to calculate the square footage of all indoor common areas. You will not be able to bill for utilities used in those areas.
It is still your responsibility to pay the utility bills, even using the RUBS system.
Sub-metering is most often used for water/sewer, although it can also be used for natural gas and electricity. It is very rare for landlords to implement submetering without a vendor, because the system is much more complex than RUBS. It requires the installation of sub-meters and a way to check them on an ongoing basis.
In fact, sub-metering wasn’t really practical for many years, since meters had to be checked in person and were typically located inside tenants’ units. Tenants were reluctant to let meter readers into their units. However, sub-meters can now be checked wirelessly from outside the unit.
Billing, payment and collection are very similar to RUBS systems in that the vendor pretty much handles everything and sends you payment. The vendor will typically charge you a flat fee. The original utility vendor’s contract continues to be with you – it is your responsibility to make full payment of each bill.
Introducing utility cost transfer to your tenants
You will most likely introduce the change to tenants when a new lease is signed. It will be much harder to make the change in the middle of a lease, since the tenant will probably think “there’s nothing in this for me.”
As noted several weeks ago, sub-metering is a fairer system than RUBS, in that each tenant pays only for the gas, water/sewer or electricity he actually uses.
Regardless, you will want to make these points to the tenant:
- You are not making any profit off their utilities (in most states, it would be illegal for you to do so)
- The tenant’s rent is going to be reduced by the amount you had been paying for utilities
- The tenant can reduce his overall expenses by taking conservation measures.
Image by roberthuffstutter via Flickr