As you draw up your lease agreement, you’ll have to stipulate who will pay utilities. If you’re like other landlords, this portion of the contract may give you pause. Is it better to cover the utilities or let the tenant do that?
If you were to cover the cost of utilities for your tenant, it would probably look something like this: You’d raise the rent price to include the potential cost of utilities, or you’d ask for a separate utilities fee to be paid each month.
The Pros and Cons of Covering Utilities for Rental Properties
Consider an example for a clearer illustration. You can charge $1,000 for rent alone. And you figure it will cost about $200 in utilities per unit each month.
Your options are to ask for a flat-rate rental fee of $1,200 or charge $1,000 for rent and $200 in separate installments for organizational purposes. You may choose whichever method makes things easier for you.
Your responsibility as a landlord is to maximize your cash flow. You’ve probably heard about landlords who were covering utilities for their tenants, which allowed them to increase the rent. As a consequence, this boosted their profits. But in other cases, landlords lost money.
It’s good to learn from those who have gone before, but everyone’s situation will be different. Looking at both sides of the issue will be necessary before you can choose the best situation for your rental properties.
Here’s a list of pros and cons to help you decide.
Pro: You don’t have to retrofit separate meters
In some apartment buildings, particularly the older ones, there are not separate meters for each unit. The same goes for a large house that has been turned into several apartments. The cost of retrofitting separate meters for each dwelling could be quite high.
You can factor the costs of installing each unit and compare it against the costs of charging a flat-rate utility fee. It’s often more advantageous to ask for a flat-rate utilities fee with the rent payment rather than get meters installed.
Con: You run the risk of covering utilities out of pocket
There are formulas and recommendations for working the potential cost of utilities into your rent price. You’re not likely to arrive at a perfectly accurate estimate. You can include a healthy margin of error in your fee. But you still might end up having to cover some utility costs.
When tenants aren’t expected to be covering utilities each month, some lose their incentive to conserve energy. They’ll run the heat and air conditioning all day and take long showers partly because they can.
If you’ve worked out a healthy fee to include in your rent, you’ll be covered. But sometimes you’ll be paying extra out of your own pocket to cover a presumptuous tenant’s utility expenses.
Pro: You could make a little extra money
Although losing money is always possible, there are also potential rewards. If you’ve calculated a fair rent price including utilities, your building utility bills might come in lower. When that happens, you’ll collect the extra.
If you have a multi-unit property and a healthy margin of error for utility fees, you’re more likely to make a profit in this manner. Even if one tenant goes over, your more conservative tenants will spend less in utilities, and their extra fees will cover your errant tenant’s power and water, and then some.
Con: It could attract lower-quality tenants
Your risk of attracting low-quality tenants increases when word gets around that you are covering utilities. A utility-covered lease means tenants won’t have to put utilities in their name, which is appealing to people who have bad credit and a history of not paying their bills.
This could lead to a rise in complacent, sub-par tenants who don’t regularly make rent. Tenants who have to register utilities in their own name tend to be more organized and more likely to pay their bills on time.
They might take ownership of the property and treat it with more respect than if these costs are completely covered by the landlord. This is not always the case, but it’s something to be aware of.
Pro: It’s a great perk for tenants
If you’re less concerned about attracting high-quality tenants and more interested in keeping units filled, including the utility costs in your contract could be the perfect solution. Even the most responsible tenants are interested in an all-expenses-paid apartment deal because it makes their lives a lot easier.
If you choose to start covering utilities in your rent, use that as a chief marketing angle. The interest in your properties will spike, and you’re more likely to keep your units full and lose less money in the long run.
Con: Rent prices will be higher, which can be damaging in a bad market
Even though a utilities-included rental property is more convenient for tenants, the higher rent price can scare people off in a bad market.
It’s a sharp move to factor in market conditions carefully before you decide whether to include covering utilities in your rent.
Pro: It can be easier
Making sure each meter is attached to the right apartment and read correctly is a lot of work. In most cases, the electric/water/gas companies will send out bills to each tenant so you don’t have to, but sometimes, they’ll send one giant bill to you, and you have to separate the costs according to each tenant.
You also don’t have to worry about utilities getting shut off in certain units and getting tenant complaints because you’ve handled everything yourself.
Con: You have to deal more with local utility companies
On the other hand, managing all the utility payments on your end can be a headache. Utility companies do their best to offer a seamless experience for landlords, but they can make mistakes.
They can also be difficult to get ahold of and very strict about technicalities. You might not find yourself involved in utility company disputes very often. If it happens, you may end up being the one on the hook.
Contact Green Residential Today!
Dealing with covering utilities is just one of many hassles that landlords tackle on a regular basis. That’s why we recommend using our property management services at Green Residential.
We know how complicated it can be to collect rent, work with tenants who miss utility payments, and handle the day-to-day business of your property. We have a variety of services that make it easier to be a landlord and realize profits without stress.
At Green Residential, we also want to keep things simple and more affordable. We charge a flat fee for our services rather than a percentage. For more information about how Green Residential can help you, contact us today!