One of the many factors that must be analyzed when considering an investment property is the cost of utilities. Usually with every investment property, there will be some utility costs associated with it. Sometimes these costs may be minimal, as they may be with a single family rental. Other times, they may be significant, such as with a 24-unit apartment building with a central boiler for heat and hot water.
As landlords, we want to maximize our cash flow. Maximizing cash flow often means passing on those utility costs to the tenants who use them by including utility costs with the rent. But should you include utilities with the rent? The answer to that question will depend on many factors. Here are some thoughts on the topic.
Related: The Not-So-Obvious Problem with Billing Back Utilities to Tenants
Why Include Utilities?
- Your building is not separately metered. I find this a lot in older buildings, especially those that were single family houses that have been converted into multifamily units. It is simply cost prohibitive to retrofit and meter all of the units separately.
- You don’t want the double hassle of sending out utility bills and then collecting the utility payments. A utility reimbursement program that divides up utilities on square footage can really be a pain, especially when tenants complain that “they did not use that much heat/water/electricity,” etc.
- You can potentially make a little more money. I have talked with landlords who include the utilities in the rent and charge a bit more for the service, even if the units are separately metered. This can improve their cash flow.
- You can’t charge a “per person” fee, as this may be construed as discriminatory against larger families.
Related: Why Landlords Should Reallocate Utilities to Improve Net Income
Why Not Include Utilities?
- It makes your life easier. If you can require your tenants to get utilities in their own name, you do not have to bill, collect payments or take the phone calls. It just makes your life easier.
- Your utility expenses will increase. When utilities are included, there is no incentive for the tenant to conserve. I have seen it time and time again where the tenant has the heat turned way up and the window open to cool it off.
- You might get better quality tenants. It has been our experience that those tenants who can get utilities placed in their names are simply better tenants. They pay their bills and are generally more responsible. Your local market may vary.
- You spend less time dealing with the local utility. This can be a real time and headache saver.
While you can potentially make a little more money including utilities, their inclusion can be a real killer of your time and can increase the level of stress in your life. For me personally, I am looking for more free time and less stress, so it is a no brainer. I will rarely look at buying non-separately metered properties anymore, nor do I generally include utilities in the rent. But that is just me.
Your market or your style may be different. You may have to include utilities, or it may be common practice to include them. Either way, that is one of the beautiful things about the real estate business—there is no one or right way to do it.
We are republishing this article to help out our newer readers.
Do you include utility costs with the rent? Why or why not?
Let me know what works for you with a comment.