Overview of Utilities
Let’s start with the basics: a utility is an essential service furnished to the public by a company (sometimes private, sometimes publicly owned). You can probably name a few utilities off the top of your head, such as light and water. In general, there are six types of utilities:
- Water
- Heating and cooling
- Electricity and gas
- Trash and recycling
- Internet and cable
- Phone lines
As a landlord, you must decide how you want to manage utility expenses for your properties. Do you want to pay for those yourself and charge a higher rent price to cover the expense? Do you want to pass payments for utilities onto your tenants? Or do you want to employ some mix of the two?
Many landlords consider some utilities, like phone lines and Internet, to be amenities that tenants should provide for themselves. Other utilities are more standard, and it’s not uncommon for those services to be bundled into the rent charge each month. Check the landlord-tenant laws in your state to see what’s been decided for you. But regardless of the utility, how you manage it, or your municipality’s rules, you’ll want to carefully outline utility responsibility in your lease agreement. Provide a clear answer to questions like which utilities will be provided, the rules and limitations governing how tenants make arrangements with providers, and how the payments will be made. Most important among these questions, of course, is who should pay for the utilities.
Option 1 – Have Your Tenants Pay
Most commonly, landlords will require tenants to cover the cost of all utilities. If you plan to do this, ensure there is a clause in your lease agreement that directly addresses this and definitively places the responsibility of all utilities on the tenant. Typically, this language includes a phrase like “tenant agrees to have all utilities placed in their name at the commencement of this lease agreement.”
For single-family residential properties, this is an easy proposition – there is one family or group of renters for one electric, gas, water, sewage, etc. bill. However, multi-family properties can often be a bit trickier. Most utilities are metered individually by unit, but water is often shared by the entire property. In this case, it’s not possible for each lease group to place the water bill in their name and it’s not fair or equitable to force one group to cover the bill for the entire property. Submetering can be a solution to track individual usage, but it often costs hundreds of dollars to install each submeter with additional charges monthly. Instead, landlords often choose to cover the cost of water on multi-family units or charge their tenants for just the water.
Of course, if the tenant does not reach out to the utility provider and place the bill in their name it can be a minor headache. As the owner of the property, you’ll continue to receive bills and we would advise that you continue to pay them. But be sure to charge the tenant for any amount you are forced to cover.
Pros
- No direct cost to you
- Tenants take ownership of bills
- Tenants are often more conservative in their utility usage
Cons
- Some utilities can’t always be split by unit
- The tenant must place utilities in their name
Option 2 – Charge Your Tenants
If you don’t want to go through the potential hassle of relying on your tenants to place the utilities in their own name, you can alternatively keep everything in your name and charge the tenants yourself. This can simplify the tenant and lease transition. It’s one less thing for you to track and one less thing for your tenants to worry about.
If you choose to handle utilities on your property in this manner, you’ll have a second decision to make: should you charge tenants a flat rate each month for utilities or charge them an amount based on usage? In some cases, like the water bill example above, it won’t be possible to charge tenants based on usage. Additionally, if you have a large number of units and you choose to charge tenants for individual usage, you may end up with a bookkeeping and communication nightmare.
A flat fee is a great alternative as it simplifies the process once the lease is signed. Many landlords also choose to rope the utility fees into their rental amount (ideally as an additional line item). These charges can be negotiated upfront or even paid in advance. We’ve seen some landlords assess utility fees for the duration of the lease at the time of signing. The only two drawbacks of charging flat fees for utilities are 1) your tenants may not pay as much attention to their consumption and 2) the bills may exceed the flat rate you’ve charged. For this reason, it’s particularly important to ensure you’ve set a sensible rate that is both fair to the tenants and to you as you cover the cost of the utilities. When setting the amount to be charged, take note to consider usage fluctuations by season.
Pros
- Simplify tenant transition
- Flexibility in billing structure
Cons
- You’ll continue to pay bills
- One more thing to collect
- Potential of paying more than you receive (flat fee only)
- Administrative headache (usage-based fee only)
Option 3 – Cover Utilities for Your Tenants
This one is a bit of a misnomer – whether you explicitly charge your tenants for utilities or not, they are paying for it in some capacity. As a landlord or property manager, you maximize the positive cash-flow of your properties, or at the very least, you charge what you can to break even. If you feel that, to remain competitive in your market, you need to cover the cost of a particular utility, that cost affects your bottom line and impacts the rent you choose to charge. If you could charge more for rent or for utilities, chances are, you would. So whether the bill is being paid from your bank account or your tenant’s, there really is no such thing as covering the utilities for your tenants.
That being said, it can be an excellent and compelling proposition to market your properties as “utilities included.” For some tenants, avoiding the process of placing the utilities in their name and remembering to make monthly payments can be very enticing. This can be particularly effective if your unit would typically demand a lower rent than many competitors on the market. Mark your rental rate up to the market average and advertise utilities as included. Tenant’s will notice.
Do keep in mind, though, if you’re covering the cost of all utilities, your tenants will likely give little concern to their usage of those utilities. Bills that your tenants don’t pay themselves tend to be larger bills than average. Be sure to consider this when calculating your expected expenses.
Pros
- Simplify tenant transition
- Flexibility in billing structure
Cons
- You’ll continue to pay bills
- One more thing to collect
- Potential of paying more than you receive (flat fee only)
- Administrative headache (usage-based fee only)
How Should I Structure Utility Charges?
Ultimately, deciding on how to structure your utility charges will be based on your personal preferences and the types of tenants you’re renting to. If you don’t think your tenants will overuse and you know they’ll always pay on time, it might make sense to just leave the utilities in your name. If you’re concerned with payment, you might be better off having the tenants put utilities in their name.
Whichever route you choose to take, make sure it is clearly spelled out in your lease agreement, and that you take the time to verbally communicate it to your tenants. After all, most tenants barely pay attention to the document they’re signing. But as long as you make the next steps apparent, you should be in great shape.
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