Should You Include Utilities With Rent [Pros vs. Cons]?
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 utility service as part of the monthly rent. It's a question a landlord has to answer when writing up the terms of a lease and setting the rent: Who is going to pay for things like electricity, gas, water, heat, and so on?
Rental Property Utilities 101
We'll get to the answer soon enough. But first, there are some basics you have to consider.
Do you have separate utility meters? If so, you will have 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. If you are considering utilities with apartment rent, consider the number of separate meters that would be needed. Those costs can really add up!
It's also a good idea to take into account the competitiveness and price sensitivity of the local rental market. Including apartment utilities will 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.
Finally, keep in mind that these are the utilities that you’ll have to consider:
- Natural gas
- Trash collection
- Water and sewer
- Internet, cable, and telephone
- Security system
The "Pros" and The "Cons" of Including Utilities in Rent
You will discover, as with anything involving a rental property, there are no free lunches. That said, there are some things to consider, such as the pros and cons, listed below. You must also consider the size and type of investment property under consideration.
Are you considering including utilities in apartment rent or in a 4-plex property?
What about a single-family home?
These different property types will yield different outcomes.
Pros of Including Utilities in Rent
1. Better Tenants
Some landlords say residents 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 before consulting with an accountant.
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. Streamlined Payments
Tenants may have an easier time budgeting their expenses if their utilities and rent are bundled together. As a result, you’ll be less likely to have to deal with late payments.
5. 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. This will also decrease vacancies and speed up rental property turnover since tenants can be moved in and out faster.
6. Credit Card Rewards
If the utility company lets you pay with credit cards, then you’ll be able to save up a lot of credit card rewards at zero cost! You need to be careful that the utility doesn't charge a fee for credit card use.
7. Utilities are Tax Deductible
Utilities are tax-deductible if you're covering them because they're a necessary business expense associated with owning and managing your own real estate rental business.
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: running the air conditioning while out of the house.
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 or less usage. That said, your out-of-pocket costs can fluctuate throughout the year.
4. You Take on The Tenants’ Liability
If a tenant is paying for their own utilities, then the utility company comes after them if they fail to pay. If you’re paying for the tenant’s utilities and the tenant fails to pay, then unless you can make up the difference, the utility company is coming after you!
Find out what utilities generally cost for the unit and, just as importantly, how they vary by season. The property's previous owner or the local utility companies can give you estimates of monthly expenses.
1. Extended Guest Stay
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. This is something you could address in your rental agreement. In some cases, a property manager will set a threshold for the number of days that a guest can stay in a month.
Once that threshold is reached, a fee is applied. This is meant to discourage a guest from functionally becoming an unofficial tenant. Although, keep in mind that it’s unreasonable to forbid extended stays.
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?
3. Operating a Business Out of a Rental Property
With the near-ubiquity of remote work in many fields, it’s also becoming more common for people to run businesses out of their rental properties. This may also lead to an increase in utility usage, so it’s wise to include stipulations about home businesses in your lease agreement.
4. HVAC Maintenance
Regularly maintaining and eventually replacing your HVAC will keep your heating and cooling costs more manageable. Additionally, a well-maintained HVAC is crucial for the health of your attic, roof, and gutters.
If the temperature in your attic is not properly regulated, then the imbalance can melt snow on your roof during the winter. This will lead to icicles forming on your gutters and melted snow to collect on your walkway, which, if frozen, can lead to injury.
5. Fixed vs. Variable Pricing
You'll have to decide if you want to go with fixed or variable pricing. Fixed rates are easier but may be harder to set. Variable rates require more effort but will more accurately reflect the cost of utilities. Be prepared to negotiate this cost when dealing with a tenant, as well as whether or not you will impose fees upon what you deem to be “excessive use.”
6. Energy Efficiency Upgrades
Making upgrades that make your property more energy-efficient may save you money in the long term, even though the cost may be high upfront.
Consider that your improvements will qualify for depreciation, a tax write-off that will make your improvements more affordable. Also, consider making your improvements during a tenancy rather than a vacancy so that your tenants may appreciate the improved living conditions. Doing so is a gesture that increases lease renewals.
7. No Per Person Fees
You can’t charge a fee based on the number of tenants because that would discriminate against larger families.
8. You Cannot Turn Off Utilities
You can’t turn off your utilities; not even if you’re in the midst of eviction or have a challenging tenant.
9. Keep the Temperature at Least 65°F
To maintain the comfort of your tenants and to keep pipes from freezing, you should keep the temperature set to at least 65°F.
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, but for single family rentals, Mynd generally suggests not including utilities. It’s just a matter of weighing the pros and cons to make an educated decision based on your needs. No matter your choice, a good property management company can help you avoid headaches.
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