As a landlord, there are many important factors to consider when leasing property to maximize cash flow. One of these factors includes your rental unit’s management and cost of utilities.
But who is responsible for paying utilities for rental properties? The answer: It depends. Which party pays what utility bills can vary depending on various factors, such as the rental agreement, local laws, and the preferences of both the landlord and the tenant.
Our survey with data from 2023 does show, however, that two-thirds of landlords chose NOT to include any utilities in rentals.
In this comprehensive guide, we will explore how landlords handle utility bills, the pros and cons of various approaches, and what factors should be considered when deciding who pays for utilities in a rental property.
Key Takeaways
- Of over 100,000 landlords surveyed in 2023, only one-third of them chose to include some or all utilities in rent.
- Trash, water, and electricity are the three kinds of utilities most often included in rent.
- Landlords pay for water and trash collection.
- Many state laws prohibit landlords from overcharging tenants for utility bills.
- Utilities provisions in lease agreements should clearly outline the responsibilities of each party, payment method, and if any utility is included in rent.
Common Practices
There are three standard practices for paying utilities in a rental property:
- Sharing between landlord and tenant;
- The landlord pays all (with an allowance); or
- The tenant pays all.
Let’s explore each of these practices and their pros and cons.
1. Sharing
Good for: Properties with extensive common areas or shared heating systems
Some landlords choose to share the cost of utilities with their tenants. This means both parties contribute a certain percentage or amount towards the utility bills.
Sharing utilities can be a fair and cost-effective approach. Landlords usually pay for utility services that can’t be put in a tenant’s name, and the tenant pays the rest.
However, this practice can also lead to disputes and complications if there is a disagreement on the allocation of costs or if one party fails to contribute their share. It’s important for the parties to specify and document which utilities will be shared and the exact allocation.
Our survey shows that trash, water, and electric bills are the top three utilities included in rent payments for landlords willing to share utility bills with tenants.
Pros
- Shared responsibility
- Fair distribution of costs
- Encourage tenants to be more mindful of energy consumption
Cons
- Disputes may arise if there is a disagreement on the allocation of costs
- One party may fail to contribute their share
2. Utilities Landlord Pays All
- Water
- Trash collection
Another approach is for the landlord to pay for all the utilities. Some landlords do a fixed amount on top of the monthly rent, while others include an allowance in the rent to cover these costs.
This approach provides convenience for both parties: Tenants only need to make a single payment for rent and utilities, and landlords can streamline the payment process, significantly reducing the potential for misunderstandings or disputes over utility expenses.
In addition, including utilities can attract prospective renters as they won’t have to worry about dealing with utility payments and management. This simplicity carries over to the opportunities in acquiring new tenants who might be looking for a hassle-free payment method.
However, landlords should be cautious not to overcharge and ensure that it aligns with the actual utility costs to avoid potential legal issues.
Pros
- Streamline payments for both landlords and tenants
- More predictable expenses for tenant
Cons
- Risk of overcharging
- May limit the pool of potential tenants due to higher rental costs
Can a landlord profit from utilities?
Profiting from utilities by extensively overcharging can be illegal in some states. Even if utilities are included in rent, tenants have the right to access detailed utility bills. A minimal administration fee (typically no more than $5) can be deemed harmless if both parties agree; nevertheless, it is advised that landlords charge an amount that accurately reflects the actual utility bill.
3. Utilities Tenant Pays All
- Electricity
- Gas
- Internet/Cable
Despite the advantages incorporating utilities into the rent may provide, most landlords prefer tenants pay their own utility bills. This means the tenants manage their own utility accounts with the utility company and are directly billed for their usage.
While this approach may require more administrative work for tenants, it gives them more control over their utility expenses while minimizing the landlord’s financial responsibility and liability.
Furthermore, this strategy helps in keeping the landlord’s costs predictable. When utilities are included in the rent, tenants may not be as inclined to use these services economically. Requiring tenants to pay for their utilities can encourage more mindful consumption, particularly with utilities that fluctuate seasonally, like gas.
Additionally, landlords can advertise their properties at more competitive rates by not bundling utilities into the rental price. This makes the rental more attractive to prospective tenants who perceive a lower upfront cost as a significant saving, potentially leading to quicker rental agreements.
If you’d like your tenants to pay for utilities, ensure that tenants know their responsibilities and provide clear guidelines on setting up and paying for utilities.
Pros
- Tenants have more control over utility expenses
- Landlords are relieved of managing utility bills
Cons
- Tenants may face challenges in setting up and managing utility accounts
- Landlords need to intervene if tenants fail to pay
What happens if my tenant fails to pay?
Review your lease agreement for stipulated actions. Some states, like Texas, allow you to disconnect utilities if you provide the tenant with a written notice that the utilities will be cut-off for non-payment beforehand. Ensure compliance with local laws regarding utility disconnections and evictions to protect your property while respecting the tenant’s rights.
Factors to Consider When Deciding Who Pays Utilities
When deciding who should pay utilities in a rental property, landlords should consider several factors:
Rental Market
Research the average utility expenses for similar properties in your area to forecast the costs for your rental unit.
This can help you better anticipate the necessary expenditures for utility usage for your property so you can adjust the rent price to accommodate for the costs or realize it would be more suitable not to include utilities at all.
Advertising Tip
When you advertise your property, your rent price may appear higher than other listings if utilities are included. Make sure to highlight that fact in the header if possible (e.g., Rent includes electricity and water).
Property Type
The type of rental property can also influence who pays utilities. For example, in multi-unit buildings with shared meters, it may be more practical for the landlord to pay for utilities, whereas in single-family homes, tenants are typically responsible for their own utilities.
Many states require landlords to provide clear explanations on how shared utility costs are divided before asking for payments. This explanation must be given in writing, either as part of the lease or another document, and it must detail the method used to split the bill among everyone.
Energy Consumption
Energy consumption and level of insulation can have a significant impact on gas and electricity bills.
Make sure you assess the type of appliances you have and the structure of your housing unit to know which utilities to include in your rent if considering this option.
- What is the R-value (insulation rating) for the windows and walls?
- Are the lights and appliances energy-efficient?
- What is the estimated energy consumption?
If you choose to include utilities in the rent, you should determine the most accurate price that covers the scenarios for varying and atypical usages of utility.
Consider price fluctuations throughout different seasons, where heat and gas can increase significantly during the winter. Anticipate how tenants may take advantage of the all-inclusive utility fee in the rent and use gas, water, or electricity more excessively.
Potential for Dispute
Even if your tenants are responsible for the billing, they may still accost you with questions and concerns about utility usage. They might suspect the house’s age is causing their gas bill to spike, or question if the high electricity usage could be due to inefficient appliances.
Late payments are another inevitable aspect you should anticipate when tenants are responsible for utility bills. This scenario can become a breeding ground for disputes, as it affects the financial dynamics and the landlord-tenant relationship.
Utilities Provision in Lease Agreements
No matter which approach you and your tenants agree on, you should detail the expectations and responsibilities in your lease agreement to prevent future issues and misunderstandings.
Key points to address can include:
- Who is responsible for managing which utilities?
- Where is the payment going to be made? Through the landlord or the tenant’s account?
- When should the utility payment be made if it is through the landlord’s account? Will there be any late fees?
- What utilities come with the rent?
- If any utility is shared, what is the allocation breakdown between the landlord and tenant?
The lease agreement can ease any possible tension caused by utility disagreements and should reinforce the responsibilities between you and your tenant.
Laws on Utilities
Landlords must be aware of the state and local laws regarding utilities in rental properties. Landlord-tenant laws can vary by jurisdiction, so it’s crucial to research the specific regulations in your area. Some common legal considerations include:
- Habitability: Landlords are generally required to provide habitable living conditions, which may include ensuring access to essential utilities such as water, heating, and electricity.
- Non-Retaliation: Landlords cannot shut off utilities or take adverse actions against tenants in retaliation for exercising their legal rights, such as reporting code violations or requesting repairs.
- Fair Housing: Landlords must ensure that their policies regarding utility payments do not discriminate against protected classes under fair housing laws.
- Transparency: In the case of shared utility bills, landlords must provide clear explanations (usually in writing on the lease agreement) regarding how costs are apportioned before signing the lease. In addition, landlords must provide tenants access to all utility bills should they request during tenancy.
- No overcharging: Some states, such as California and Texas, prohibit landlords from asking tenants for more than what utility services ask for when paying utilities. New York, as another example, requires landlords to make refunds and charge adjustments to tenants for past overcharges due to shared meter conditions.
Consult with a local attorney or housing authority to ensure that you are in compliance with all applicable laws and regulations.
Conclusion
Determining who pays utilities when renting a house (or any property) is a decision that should be made carefully. Whichever approach the landlord and the tenant agree on, both parties should clearly communicate the responsibilities in the lease agreement and comply with applicable laws and regulations.
By approaching utility payments thoughtfully, landlords can create a positive rental experience for both themselves and their tenants.