Property owners have the opportunity, in most cities, to decide whether they want to include utilities in their tenants’ rent. While it may simplify matters in some ways for the investor to take on the responsibility of the gas and electric bills, and some landlords say it attracts better tenants to do so, there are real risks to handling these expenses in this way.
Typically, property owners are not charitably paying expenses themselves. They calculate an average monthly cost for utilities and bundle that cost into the rent. So it’s very important to determine what utilities cost before assuming responsibility for them. It’s also important to know that including utilities in rent for rent-controlled housing is illegal.
The most common utilities under consideration are water and sewer, electricity, gas, and trash and recycling. Other common utilities are internet, cable, and telephone, but those are almost always the resident’s responsibility.
Any lease agreement should lay out clearly what utilities are included in the rent, if any, as well as any local requirements as to what provider must be used for any particular utility.
The pros of including utilities in monthly rent
The owner can charge a premium
For taking on the responsibility of paying the bill, the landlord can charge a premium.
Ease for residents
Once the process is set up, the tenant has just one bill to pay each month. This may be attractive to clients who want to minimize administrative hassles as well as those who find it difficult to budget for multiple expenses each month.
Utilities are one of the costs of running an investment property, so they are tax deductible.
Credit card rewards
If the utility company allows customers to pay their bills with a credit card with no fee, the owner can earn benefits on their preferred credit card, such as airway miles, with money that’s actually being spent by the resident.
The cons of including utilities in rent
The owner takes on the liability for paying the bill
If a resident is responsible for the electricity and doesn’t pay the bill, the utility provider will compel the tenant to pay, and may even cut off service. But if the owner’s name is on the account, and the tenant fails to pay, the owner is responsible all the same.
And the law frowns on so-called “self-help evictions,” in which an owner tries to compel a resident to leave without bringing the law into it.
Tenants may have no incentive to conserve
Residents may not be inspired to save energy if they feel they are not paying for it, and might be less conscientious about, say, leaving lights on all night or maintaining tropical levels of warmth in the dead of winter.
Rising rates can cut into profitability
Utility companies can change their rates without notice. If an owner accounts for a $100 electric bill as part of the rent, but the cost to the landlord rises to $150 in a given month, that impacts rental returns.
To get around this problem, the owner can set a dollar cap on how much can be covered as part of the rent. If the cost to the owner exceeds that amount, the resident can be required to make up the difference. (This can help avoid the disadvantage of tenants having little incentive to conserve.)
The rent may appear higher to prospective renters
In highly price-sensitive markets, prospective tenants may see only the price tag, not consider the fact that it includes rent, and rule out a house where utilities are included. If they are searching for homes based on price, they may even filter homes above a certain rent.
The bottom line on including rent with utilities
Should property owners include utilities with rent in their rental properties? There is no one correct answer for all investors.
It depends on factors that vary by market and the investor’s tolerance for risk and additional administrative work. The investor may be able to earn more and attract more desirable tenants. On the other hand, it will add one more complication to your property management.
Investors can always take these tasks off their plate by hiring a good property manager, like Mynd.