As a landlord, there are many important factors to consider when leasing property to maximize cash flow.
One of these factors includes the management and cost of utilities for your rental unit.
Should Landlords or Tenants Pay Utilities?
Landlords should explore whether to include utilities as part of the rent or have utilities under the tenant’s responsibility.
Both scenarios have benefits and setbacks, and it’s essential to weigh the different options before drafting a lease agreement.
Pros of Including Utilities in the Rent
Streamline payments & interactions for both parties
Including utilities in the monthly rate will prevent several possible ambiguous situations or negative interactions with tenants. It streamlines payment collection to just a single exchange, removing the hassle of collecting tenant utility payments.
It also prevents unwanted uproar if a tenant disagrees with the price of a utility bill.
Including utility costs in rent can help reduce this additional trouble, strengthening your relationships with your tenants and overall property experience.
Attract tenants and close deals faster!
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.
Possible increase in revenue
You can make an additional profit if what the rent covers for the utility is more than the given expected rate for the utility costs.
If the expected cost for the use of utility exceeds the actual usage cost, that additional income can go towards reinvestment in the property or be considered profit.
Cons of Including Utilities in the Rent
Minimize your financial responsibility and liability
If bills are sent directly to your tenants, you don’t have to worry about collecting payments or managing the utility account.
Paying for your tenants’ utility expenses is an additional responsibility you may want to carefully consider.
If for any reason, the landlord fails to cover the payments on time for the utility costs, then services such as hot water and electricity might be suspended.
This would negatively affect the tenants’ living conditions and risk your overall business stability, a risk you might not be willing to take.
Keep your costs predictable
If you include utilities in the rent, tenants may not be as motivated to conserve and be more wasteful. This can cause unanticipated increases in your utility expenses.
One way to counteract these fluctuations is by allowing the tenant to pay for an individual utility.
For example, depending on where you live, gas costs could be lower in the summer and higher in the winter. In this case, tenants might want to know the exact amount they are responsible for, rather than pay a flat fee for the expenses.
By splitting the responsibility and being more adaptable, you can keep your costs predictable and your tenants confident in what they pay.
Market your rental unit at a more competitive price
If you don’t include utilities in the rent, you can market your rental unit at a lower price on listings and gain more interest from prospective tenants.
A tenant will likely view a lower-cost rental as a considerable saving compared to an all-inclusive price.
Factors to Consider When Deciding Who Pays Utilities
If you are managing the utility account and billing tenants separately…
- Will there be a fixed price or variable price?
- Be wary of dealing with your tenants if they want to negotiate with you on the utility bill and usage.
- Will there be a late fee for utilities if your tenants don’t pay on time?
If you include utility costs as part of the rent…
- Be sure to consider price fluctuations throughout different seasons, where heat and gas can increase significantly during the winter (so you don’t have to send a Notice of Rent Increase if the lease allows it).
- Tenants may take advantage of the all-inclusive utility fee in the rent and use gas, water, or electricity more excessively. Determine the best price that covers the scenarios for varying and atypical usages of utility.
- Is your rent covering all gas, electricity, water, sewer, and trash? Or will you only include water and electricity?
- Keep in mind that when you are advertising your property, your rent price may appear higher than other listings even though you include utilities. Make sure to put all the necessary details in the header if possible (e.g., Rent includes electricity and water).
If you are not including and managing utilities…
- Tenants may still accost you with questions and concerns about utility usage, even if they are responsible for the billing. How come my gas bill is so high this month? Is it because the house is old and uses up more? This type of washer uses a lot of electricity; can we get an energy and water-efficient one instead?
Before Deciding Which Option is Best for You
Do some research
Research the average utility expenses for 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 the costs or realize it would be more suitable not to include utility at all.
Consider the energy efficiency of your unit
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?
Clarify your financial goals and expectations
Do you include utilities in the rent to maximize cash flow, or is it for convenience? Knowing your objective is essential to effectively selecting the option that best fits your needs.
Make sure to use a valid lease agreement
To prevent future issues and misunderstandings regarding utilities with your tenant, detail the expectations and responsibilities in a lease agreement.
- 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 utility payment be made if it is through the landlord’s account? Will there be any late fees?
- What utilities come with the rent?
The lease agreement can ease any possible tension caused by utility disagreements and should reinforce the responsibilities between you and your tenant.
Consider all possible scenarios before deciding whether or not to include utilities or not and one that would make both parties content.
