As a landlord, you have a great deal of control over your expenses and rental prices. Obviously, you’ll want to make decisions that maximize your potential profit and income stream, but not all decisions are so straightforward. For example, in most areas, landlords will have a choice of whether to pay for utilities out-of-pocket (and build utility costs into the rent at a fixed price), or whether to charge less rent and have the tenants take care of the utility costs.
There are advantages to each model, but you should know what you’re getting into before you make the final decision.
Advantages of Including Utilities in Rent
If you’re considering including utility costs as a built-in feature of rent, these are some of the biggest advantages to consider:
- Payment streamlining. One of the biggest advantages is the financial streamlining you’ll see, for both parties. With rent and utility payments bundled together into one payment, it’s easier for tenants to budget their living expenses every month, and you can deal with the utility payments yourself. If there are any unexpected increases in utility costs, tenants won’t be as likely to become upset, therefore strengthening your relationship and minimizing tenant turnover.
- Tenant convenience and attraction. Some tenants will specifically seek out apartments or properties where utilities are included. Renters who pay for utilities as part of rent don’t have to deal with putting the utilities in their name, which means they can move in faster and have fewer responsibilities to worry about. In most cases, that means you’ll be able to attract tenants faster, and move them in faster, reducing your total vacancy time.
- Higher revenue streams. Incorporating utility costs into your rent structures means you’ll be collecting bigger revenue streams from your tenants. If you build in a buffer, charging slightly more in rent than you actually pay in utility costs, you can turn a slight extra profit each month. So long as your utility costs remain under control, this can help you stabilize or increase your income.
Disadvantages of Including Utilities in Rent
However, there’s also a strong case for letting your tenants handle utility costs on their own. These are some of the negative aspects of including utilities in the rent:
- Higher financial responsibility and liability. Unfortunately, taking on those utility costs yourself means you’ll have higher personal financial responsibility, and possibly liability too. If you charge your tenants an egregiously high amount for utilities, instead of charging them a fixed rate based on historical utility costs, they could sue you for the difference. You’ll also be responsible for paying all the bills yourself, which could be a hassle under certain circumstances. Make sure you’re charging a fair amount, and stay on top of your responsibilities.
- Unpredictable cost bases. Utilities can be unpredictable, even if you have historical information on which to base your pricing. The cost of raw materials can rise or fall based on supply and demand, and tenant usage may fluctuate unexpectedly from month to month. This can make your profitability less stable and less predictable, if utility costs are built into your rental income. You can compensate for this by estimating costs as conservatively as possible, but there’s still a margin of error you’ll need to account for.
- Higher rental costs. When you build utility costs into the rent on your property, the total perceived cost is going to increase. Even though the total costs (rent plus utilities) of your apartment may be comparable to the others in your neighborhood, it will superficially look higher because the cost of utilities is included. This could turn some prospective tenants away unfairly, before they do the calculations for their budgets.
There are other variables and important features you’ll also need to consider before you finalize your decision. For example:
- Fixed vs. variable pricing. Consider whether you want to charge your tenants a fixed rate for all utilities, or whether you want to adjust the rate based on the actual utility costs. Fixed rates tend to be more convenient, but harder to predict. Variable rates are harder to manage, but are more reflective of actual costs.
- Negotiation and price increases. During the tenant acquisition process, you’ll likely have to negotiate the utility rates. Be prepared for that. You may also need to renegotiate those rates if there’s a spike in utility costs in the future.
- Structure and other fees. Are you going to charge your tenant utilities and rents as separate line items? Will there be any other fees you impose, such as going an excessive amount over a standard allowance for utility use, or being late with a payment?
- Seasonal fluctuations. How are you going to account for seasonal fluctuations? During winter months, when heating is running nonstop, are you going to increase the rates you charge your tenants?
- Utility splits. Are you going to charge your tenants for all utilities, or just some of them? Hypothetically, you could split this, charging your tenants for electricity but not water/sewer, for instance.
- How do you plan to advertise your costs? Will you note that utility costs are built in, or treat them as a separate charge?
- Energy efficiency. Are you going to make any upgrades to your property to make it more energy efficient? Doing so may require a significant upfront investment, but could save you lots of money in the long term.
There isn’t a straightforward “right” answer here, but there are some clear advantages to each approach. Spend some time evaluating the condition and nature of your property, considering how each advantage plays to your personal preferences, and finalizing the decision that will yield you the highest and most convenient profits.
If you’re struggling with managing the expenses, legal decisions, and day-to-day operations of your property, you should know that you don’t have to do it alone. Consider enlisting the help of a property management services firm, like Green Residential—contact us today to learn how we can help you maximize your profits, while minimizing the effort you need to expend.