The Takeaway: You may be able to charge a rent premium, but there are a few hassles that will go along with it.
As a property owner, you will have the opportunity, in most cities, to decide whether you want to include utilities within monthly rent payments or let your tenants make these payments. It’s a question you’re going to have to wrestle with if, if you haven’t already, when conjuring up the terms of a lease and setting the rent: Who is going to pay for things like electric, gas, water, heat and so on? You? The tenant?
Rental Property Utilities 101
We’ll get to the answer soon enough. But first there are some basics you have to consider.
Like: Do you have separate utility meters? That will give you the flexibility, right off the bat, to either include utilities or let your tenant take care of the electricity bill.
If not, it may be difficult for you or your tenants to determine who owes what. Of course meters can be installed or retrofitted. But this is going to cost you and it isn’t an insignificant expense. Such devices start at over $1,000 per meter, depending on the building—and could be a hassle you want to avoid.
It’s also a good idea to take into account the competitiveness and price sensitivity of the local rental market. Including utilities will obviously require a higher rent. While most prospective tenants will take this into account, many won’t. So if you choose not to include utilities you can market the rental unit at a lower price and draw more interest—especially from renters who look at price first and details later.
The "Pros" and The “Cons” of Including Utilities in Rent
As you will discover, as with anything involving a rental property, there are no free lunches. That said, here are some things to consider:
Pros of Including Utilities in Rent
1. Better Tenants: Some landlords say lodgers who take on gas and electricity, are generally better and more responsible renters. Paying utilities, as it turns out, seems to indicate that renters will pay up on time – or close to it.
2. Tax Benefits: You can deduct the cost of providing utilities. But don’t try this at home alone.
3. Rent Premiums: You can, of course, charge more for providing utilities. But you can also charge a little extra for freeing your tenants from the tyranny of the utility company.
4. Ease and Resident Convenience: If utilities are included with rent, your tenants will not have to take the time to set up their payments under their own account upon move-in. This is just one less thing for them to worry about at the start of a lease, month to month and upon move-out.
Cons of Including Utilities in Rent
1. Less Incentive to Conserve: Tenants who don’t pay their own utility bills often lose the incentive to conserve water or electricity.
For example: long, long showers.
2. The Utility Trap: Be sure to research, and anticipate, pending hikes for electric, water or other services. Otherwise, your profit margins will be rapidly eroded into desert sand.
3. Monthly uncertainties: It is difficult to determine how your tenants will use electricity and water on a month to month basis, even using estimates and averages. Different seasons can require more of less usage. That said, your out of pocket costs can fluctuate throughout the year.
Other Utility Management Pro tips:
Find out what utilities generally cost for the unit and, just as important, how they vary by season. The property’s previous owner or the local utility companies can give you estimates of monthly expenses.
1. Girlfriend/Boyfriend factor: Let’s say your studio apartment renter suddenly has a live-in? Do you have a clause in your lease for that? After all, everything from electricity to water will rise and you’ll be on the hook.
2. AirBnB: Do you have rules for that? You should. What lodger doesn’t take more time in the shower or leave the lights on when they head out for the evening?
Summing Up Utilities at Rental Properties
In the end, the decision on utilities often comes down to a choice of your convenience versus cash flow. There really is no right or wrong answer to this question, it is just a matter of weighing the pros and cons to make an educated decision based on your needs.
- Is the extra cash and tax advantage worth the time you will spend dealing with utilities?
- Or dealing with tenants who abuse your good will?
- Do you really need another headache?
A good property management company can help you avoid these headaches.
Learn about how you can estimate rental returns on an investment property!