No one likes paying utility bills.
Your tenants are no exception, and many would welcome more stable, predictable expenses every month.
But is it really worth the headaches and risks as a landlord to cover the cost of each property’s utilities yourself?
Like every decision in property management, there are pros and cons. Before deciding whether to include the utilities in the rent, let’s cover five reasons why you should and shouldn’t consider covering these costs for your tenant – depending on what your priorities are.
Cons: Risks & Drawbacks of Including Utilities
Why shouldn’t you include utilities with the rent?
There are a lot of reasons to think twice about this…
Con #1 – The “All-You-Can-Eat” Mindset
When people don’t have to pay for consumption, they consume more. We human beings are greedy like that.
It’s true for all-you-can-eat buffets, all-you-can-drink booze cruises, and — you guessed it — utilities when they’re included in the rent.
Why not take a 15-minute shower? The landlord’s paying the utility bill, after all!
When there’s no consequence for using more, people will use more. That’s bad news for you as the person on the hook for the bill, and it’s bad news for the environment too.
Con #2 – You Take on the Tenant’s Liability
Normally, the tenant is liable for their utility bills. If they don’t pay, the utility company shuts off their access. They go after the tenant for unpaid bills, not the landlord.
But, if you take on responsibility for the utility bills, you’re on the hook.
Even if the tenant defaults on the rent, you need to keep paying the utility bills. Forget about cutting off the utilities as a tactic to force them to pay up; it’s considered a “self-help eviction” and is illegal in every U.S. state.
All you can do is file in court for eviction and keep paying the utility bills the entire time, even while your tenants aren’t paying you.
Con #3 – If Utility Costs Rise, Your Margins Fall
Say electricity or gas rates go up, and the utility bill rises by $50/month. Guess who’s going to eat that cost?
You got it: You.
Granted, you can raise the rents when the tenants’ leases come up for renewal next. But that could be a year away!
And who’s to say you can even raise the rents by the amount needed to cover the higher utility bills? If the market is soft in your area, you may only be able to raise rents by $15, not $50 (or not at all, for that matter).
Con #4 – It’s Another Bill to Manage
You have a lot on your plate already as a landlord. Do you really want to take on one more bill, that you have to remember to pay on time every month?
If you pay the utility bill late and incur late fees, those costs come right out of your cash flow.
Of course, in this day and age, most utility companies offer automatic payment options. They can charge your credit card or pull it from your bank account automatically.
However, you still need to check the tenants’ usage, to make sure they didn’t surpass their usage ceiling (more on that shortly).
The bottom line: Managing utility bills add another headache to an already-heaping pile on your plate.
Con #5 – It Can Leave Your Unit Non-Competitive in Price-Sensitive Markets
Some markets are extremely price-sensitive. Renters may be willing to pay a maximum of $700/month, and not a penny more.
Remember: They can filter by that search criteria, when they search rental listing websites.
That means many prospective tenants may never even see your rental listings. Or, if they do see them, they may not understand that it includes utilities.
Or perhaps they see it, understand it includes utilities, and still don’t think it’s worth the higher rent.
These are the risks you run when you color outside the lines!
Pros: The Upside of Inclusive Utilities
Whew! Those are a lot of reasons not to include utilities. So, why do some landlords even consider it?
In short, there are also some advantages and ways to mitigate each of the risks above. Here are five pros to counterbalance the cons listed above…
Pro #1 – You Can Charge More
Well, of course, you’re going to charge more! You have to charge enough to cover the utility bills, after all.
Having said that, you can charge more than your costs, which is precisely why many landlords entertain this idea in the first place.
You’re taking on an extra headache and extra liability. So, you should be compensated for it.
Do some research on what landlords are charging in your market for comparable units with utilities included. If you can’t find any, consider experimenting with different listing rents.
Make sure you have a crystal-clear understanding of average utility costs for your unit before trying this though. The last place you want to be is stuck holding a utility bill 50% higher than the rent premium you’re charging!
Pro #2 – Set Utility Ceilings & Triggers
If a normal utility bill in January for your unit is $100 and the tenant’s bill comes in at $150, do you eat the extra cost?
The answer: No.
Instead, write into your lease agreement specific utility bill ceilings. If the tenant’s bill comes in above the ceiling price, one of two things can happen.
- A more conservative option is to make the tenant responsible for the overage. In the example above, if the ceiling is set for $100/month, then the tenant becomes responsible for paying you the extra $50. It becomes due as unpaid rent, subject to late fees if they fail to pay it.
- Alternatively, you can be more aggressive and make the tenant responsible for the entire utility bill if their bill comes in higher than the ceiling. In this case, it’s only fair to give the ceiling some wiggle room: If the normal utility bill is $100, perhaps the trigger price is $115 or $120.
Either way, tenants will pay attention to their utility usage. Using ceiling prices prevents that “all-you-can-eat” mentality from taking hold.
One final note: Be sure to set ceiling prices by season. Utility usage is much higher in summer and winter months, when air conditioning and heat are blasting. Set your utility ceilings appropriately.
Pro #3 – Combined vs. Separate Meters
If you manage a multifamily property and each unit has its own meter, your tenants can each put the utility bill in their own name and pay the utility company directly.
If the meters are shared, you’ll have to pay the utilities yourself.
In that case, you can split the utility bills evenly and bill the tenants for them. Or, you can simply include the utilities with the rent.
One problem with this scenario is when a high utility bill lands in your lap. Whose fault was it? Who was taking the 15-minute showers?
Because you can’t know, your tenants will have to share the higher costs.
Still, that problem pales in comparison to the cost of installing separate meters.
Pro #4. – “Utilities Included” Can Be an Enticing Differentiator
Many prospective tenants will love the idea of having utilities included with the rent.
You don’t have to get into the minutiae of ceilings and triggers and what-have-you. That can wait until you’re discussing lease terms with the prospect after showing them the property.
Utility bills add a variable expense to tenants’ budgets every month, which makes budgeting harder, especially for lower-income renters. Having the predictability of a fixed payment that covers rent and utilities can be incredibly attractive to prospects.
In other words, it will help your listing stand out and attract attention.
Pro #5 – Utility Costs Are Tax-Deductible
You’re charging higher rents to cover your utility costs and your headaches.
That means higher taxes … right? Sort of.
If you’re charging appropriately, and earning more than you would have otherwise, then yes you’ll pay higher taxes because your profits are higher. We can all agree that’s a good problem to have.
But, your utility costs will still be tax-deductible. They’re a legitimate business expense of owning and managing your rental units.
When in doubt, use an accountant who knows the ropes of rental properties.
Bonus Advantage: Credit Card Rewards
Does the utility company in your market allow you to charge bills to your credit card with no additional fee?
If this is the case, it opens the possibility for you to rack up rewards on all of your tenants’ utility bills. They pay you in cold, hard currency, but you get to pay the utility company using your rewards credit card.
That’s not a bad way to accelerate your credit card rewards every month!
Should you include utilities with the rent, in your rental properties?
The answer — as is the case with many business activities associated with being a landlord — is maybe.
It depends on your market and tolerance for added risk and headaches. You can earn more and potentially attract more prospects to fill your units faster. On the flipside, it will add one more complication to your property management.
Remember, you can always delegate property management by hiring a professional manager. If you go that route, just make sure they’re monitoring each tenant’s utility usage each month, and staying on top of any overage billing.