Should You Include Utilities With Rent?

Doug Brien
January 21, 2017

The Takeaway: You may be able to charge a rent premium, but there are a few hassles that will go along with it.

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.

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. (Some landlords will take the total utility costs of the building and divide by the number tenants, but this may not be fair to tenants who are not heavy users of electricity and water, etc.)

Of course meters (and sub-meters, which measure energy in individual apartments, though the utility company still charges the building at a bulk rate based on the master meter) 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 hassle you may 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 “Plusses” and The “Minuses”

As you will discover, as with anything involving a rental property, there are no free lunches. That said, here are some things to consider:

Plusses:

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.

Tax Benefits: You can deduct the cost of providing utilities. (See “Extra Help” below.) But don’t try this at home alone. (In other words: make sure your CPA knows what you’re up to.)

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.

Minuses:

Tenants who don’t pay their own utility bills often lose the incentive to conserve water or electricity. For example: long, long showers. (Something you can address in the lease by setting ceilings for, say, natural gas usage.)

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. Also: 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.

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.

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

In the end, the decision on utilities often comes down to a choice of your convenience versus cash flow. 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?

Extra Help:

More on utilities and taxes: https://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Rental-Property-Deductions-You-Can-Take-at-Tax-Time/INF26315.html

And more on Submetering: http://cooperator.com/article/submetering-your-buildings-electricity

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