Should Landlords Include Utilities in the Tenant’s Rental Price?
Landlords basically have three options in terms of how to set up and/or bill clients for utilities.
One is to build the utility costs into the rent so it is all inclusive single price for the tenant which the landlord manages.
The second is to have a set rent fee and an added-on utility cost which the landlord manages.
The third is to allow each tenant to set up the utilities in their own name and maintain these costs themselves.
Each option has advantages and disadvantages that need to be fully considered to see which is the best fit for your particular property and management style. Before we look at the pros and cons of each of these three approaches, its important to examine your current utility setup.
How are the Current Meters Configured?
Does your property have separate utility meters installed for each unit, or one master meter? If each unit has a separate meter, that gives the landlord a lot of choices without the added expense of adding separate utility meters which can be expensive.
In many districts, the utilities bill for overall usage on the property reads at the master meter, but can have submeters to individual dwellings. If the property does not have individual meters already established, that can be expensive to retrofit – like $1,000 a unit for the electrician which can add up pretty fast. Especially with older formerly single-family homes that were converted to multifamily units, the cost is simply prohibitive to meter each unit.
If each tenant has their own meter, this gives the landlord the freedom to allow your tenants to be able to put the utility in their own name and take responsibility for paying the utility company directly. If the meters are shared, then the landlord will have to pay the utilities.
If there is only one meter, then the landlord can choose how to split the usage. A couple common methods of doing that are either splitting the bill evenly or dividing it by the square footage of the apartments. However, know that dividing costs by the number of residents can be viewed as discriminatory against families and so should not be considered.
The inherent problem of splitting the bills from a single meter is that when costs run high like in the winter, tenants begin bickering about “They aren’t using that much…!” It must be someone else who is running a heater or taking a 15-minute shower. Without separate meters, its simply impossible to know if one tenant is running up everyone else’s bills which often makes this a common and ongoing problem the landlord will have to deal with on a regular basis without separate meters.
Bottom line, if you already have separate meters to different units, you have many more options the landlord can consider in terms of the pros and cons of each. If there is only a single meter, the landlord will have to pay for that, or spend a considerable amount of money to individually meter each unit.
Other Preliminary Considerations
If the landlord is going to be paying the utility costs due to there being only a single meter, then weather that is done with fixed or variable pricing is the next consideration. Fixed rates tend to be easier to compute for everyone involved, but harder to realistically predict. Variable rates are more complicated to manage, but more accurately reflect actual costs.
Variable rates are usually applied to account for seasonal fluxuations like during the winter months, when heating is running, or the peak of the summer with air conditioning. Depending upon the property’s location, these fluctuations can be significant.
How will you structure the utility rates? Will these be single line item values, or will there be certain charges if there is excessive usage once certain levels are exceeded? Are you going to charge tenants for all ongoing costs including water, power, cable, Internet, trash pick-up – or only some of them?
There’s no single right or wrong answers with any of these approaches. But these are the preliminary questions you need answers to before deciding whether or not to include utilities in your rental price because there are a number of plusses and minuses with either choice that need to be carefully weighed.
May Make Your Property Harder to Initially Rent
One of the biggest overriding considerations regarding including utilities is that it may make your property harder to rent advertising with a higher monthly rent. Some rental markets are extremely price-sensitive.
Most people search for housing online on sites like Craigslist where users filter listings by price. If you have a rental with a higher monthly price, many of your best prospective tenants may not make it past the first initial screening for people to even be able to see the fine print about utilities included.
When you include the utility cost into the rent, its going to be a higher perceived cost on first impression because it’s not easily detectable on Craigslist or Zillow whether or not utilities are included which usually appears in the text of your ad rather than the headline.
So, if you decide not to include utilities in your advertised rental rate, you can market your unit at a lower price and draw greater initial interest among applicants who look at price first and details after reading the text copy later.
The Biggest Advantage of Including Utilities is Streamlining and Increased Revenue Stream
With rent and utilities bundled together in one payment, it streamlines the transaction for everyone involved by making it a single exchange. Renters who don’t have to set up utilities in their own name can move in faster with less responsibilities to think about.
It produces a greater revenue stream for the landlord, which if properly managed with the proper buffers in place charging more for rent than is paid for utilities can increase profits or be used to reinvest in the property.
However, you do need to charge tenants a reasonable amount for services and your time managing them and assuming the liabilities or they can take a landlord to court.
If the landlord pays utilities they are a legitimate business expense of owning and managing your rental property.
A landlord can deduct for the cost of utilities as a tax break. However, this is definitely more complicated than the average person should try without getting the help of a CPA who knows what they are doing.
Credit Card Rewards Paying Utilities
Does your local utility company allow you to pay bills with your credit card at no additional fee? If so, this makes it possible for you to credit card rewards using it to pay your tenant’s utility bills, which can be significant! You are receiving cash payment from them which you are able to leverage racking up credit card rewards.
Tenants Who Don’t Pay for Utilities Aren’t as Conservation Minded
One of the biggest downsides for a landlord paying utilities is it’s a sad fact of life that people are not as careful with things that they don’t have to pay for. Giving people a fixed, or what appears to be free pass on water and electrical usage can give some people a green light to go nuts. Not everyone – but some certainly will!
When the landlord pays for utilities, tenants can stop paying rent, but the landlord cannot stop paying their utilities which is illegal in every state of the union.
If utility bills experience unexpected rate hikes, landlords can be left on the hook for the loss. If a boyfriend or girlfriend moves in that can double water use.
If you can get tenants to get utilities in their own name, this reduces the landlord’s liability and time spent collecting payments, phone calls etc. – as well as dealing with the utility company.
Some landlords feel having tenants acquire utilities themselves tends to attract a higher quality.
Whether or not including utilities in your rental price is the best solution for your property depends upon how the meters are installed, how you choose to bill the tenants in terms of fixed rate or seasonal variations, and how much the landlord wants to take responsibility for the payments or allow tenants to assume these responsibilities themselves. Including it in the rent, you may make the apartment harder to initially rent, and take on responsibilities that are time intensive for the landlord, but provide the added convenience for tenants of a single payment at a relatively fixed rate.
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