While newer apartment complexes have separate utility meters for gas and electric, older properties often have a central meter for all utilities, with the end result being units marketed to tenants as ‘utilities included.’ An attractive prospect from a marketing standpoint, the fact remains that including utilities in your tenant’s rent can be a risky policy that may ultimately pay off for tenants while costing your management company thousands of dollars a year in inflated utility costs. While increasing rents to cover rising utility costs is an option, rents can only be raised at the end of a lease period, so the tenant abusing that heating or cooling system may have nearly a year of opportunity to abuse the system until you can raise the rent.
Fluctuating utility costs also contribute to the difficulty in determining just how much to add to the market cost of each unit in order to cover your expenses accordingly. Low-ball this amount and you’ll end up paying…and paying. Water bills are particularly hard, since the majority of apartment complexes have one central billing meter. But that is beginning to change due to certain areas experiencing unprecedented drought. As a result of the drought, many cities and municipalities are instituting water restrictions that must be followed. Water conservation programs are also active in many areas, but having a central meter for all billing makes it difficult for apartment managers to truly have any control over water usage. By passing those costs directly onto tenants, you’ll be placing the water conservation effort squarely where it belongs, into the hands of your tenants.
One option for billing tenants is to use a Ratio Utility Billing System (RUBS). RUBS is a common billing method used to allocate water and sewer costs to multi-unit tenants. Certain aspects are looked at when determining a RUBS formula such as the number of occupants in the unit, the square footage of the unit, and the number of bathrooms in each unit. While sub-metering is an option, it’s often impossible to effectively sub-meter older units. Using RUBS billing system also encourages water conservation, as tenants are apt to exercise more control over water usage.
How can you make switching to ‘tenant-paid’ utilities easy on your tenants and avoid a mass defection?
- Explain the switch carefully and give tenants adequate time to prepare for the switch, which should take place when their current lease is over.
- Consider lowering the monthly rent at the time of renewal. You’ll be saving a lot of money by passing utility costs onto your tenants. By decreasing their base rent, you’ll be providing them with an incentive to stay, while still decreasing your costs significantly.
- Set up a solid receivables system for utility billing, or easier still, consider using an outside service who will handle the entire conversion and billing for you.
In this time of energy conservation, eliminating the ‘utilities included’ clause in your rental lease can save your property thousands of dollars per year while encouraging tenants to conserve resources for the future.