Recovering Utility Costs in Your Rental Properties

Often when my clients purchase a property, there is an opportunity to increase income through more effective utility recovery. I have seen rental advertisements and leases alike that include all utilities in the rent, which in my opinion is a less than ideal approach for a few reasons. 
First of all, when advertising a unit with utilities billed separately, the asking rent amount is often a little lower, which will attract more initial interest. Second, if you find the utility expenses are getting out of control, you can raise the utility cost without raising the rent; I've found tenants are more receptive to this increase than a standard rent increase (especially when provided the utility usage information). 

How to Increase Utility Recovery Income

For Multi-Family properties, there are 2 industry recommended options available to increase your utility recovery income line:
  1. Sub-metering
  2. RUBS | Ratio Utility Billing System
Each option offers unique benefits with some restrictions. Variables including property type, current lease terms, and meter availability ultimately dictate which option you choose. 
Sub-metering Multi-Family Rentals

The most accurate utility cost allocation is achieved with sub-metering. With individual meters installed for each unit, utility sub-metering allows management to bill tenants for actual utility usage per unit. This is clearly this most fair option to tenants and landlords alike as everyone is billed for their exact usage. For example, in a 4 unit property, we would have 5 meters installed; 1 per unit and 1 house meter for common area utility usage. Tenants who use more utilities are billed appropriately; Conservationist tenants are billed less.

Sub-Metering set up costs depend on the building's plumbing and electrical configurations. Total hardware & installation costs average about $350 per unit-- Hardware from $150 to $200 and installations from $150 to $300 depending on building specific configurations.

Some properties, however, will present configurations or construction constraints prohibiting sub-metering as a viable option. We may find the implementation is too expensive or physically impossible to install. In this case, implementing RUBS may be the best option.

The typical implementation and on-going process is as follows:
Utility recovery for rental property
  1. Contract 3rd party utility recovery provider, who will complete a property analysis & provide scope of work and cost estimates. 
  2. Schedule installation & Post Tenant Notices, revise leases as needed
  3. Enter Building, Unit, and Tenant information into billing system
  4. Provide master utility bills to 3rd party company each month
  5. Once leases are updated and/or proper time has elapsed, individual utility bills are created each month. 
  6. Tenants pay utility bills directly to billing company.
  7. Owner or Management monitors past due accounts, includes overdue utility bills with rent collection duties.
  8. Billing company sends a monthly utility reimbursement check to owner or management company, which is received under Utility Recover income line. 
RUBS | Ratio Utility Billing System for Multi-Family Rentals
RUBS is a program to allocate utility costs to tenants, including Water/Sewer/Garbage, Trash, Electricity, and Gas. This billing method calculates a tenant's utility bill based on a pre-calculated formula, each unit is billed a portion of the total utility cost each based on this formula. 
Variables used to determine the formula include occupancy, square footage, bed / bath per unit, number of plumbing fixtures; Each state and city has various rules and regulations surrounding RUBS billing.  
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The typical implementation and on-going process is as follows:
  1. Contract 3rd party utility recovery provider, who will complete a property analysis
  2. Post Tenant Notices, revise leases as needed
  3. Enter Building, Unit, and Tenant information into billing system
  4. Provide master utility bills to 3rd party company each month
  5. Once leases are updated and/or proper time has elapsed, individual utility bills are created each month. 
  6. Tenants pay utility bills directly to billing company.
  7. Owner or Management monitors past due accounts, includes overdue utility bills with rent collection duties.
  8. Billing company sends a monthly utility reimbursement check to owner or management company, which is received under Utility Recover income line. 
Flat Fee Utility Recovery for Single Family or MultiFamily
In my opinion, the easiest and most straight forward approach is to include a flat fee utility charge. Here we simply include a per month per person utility charge to each lease, which is separate from rent. We calculate this amount by taking the annualized utility costs at roughly 80% and dividing by the number of tenants residing in the property last year.  In Washington, landlords are not allowed to turn a profit on utility costs, so we need to ensure your utility recovery income line does not exceed the utility expense line(s). As you can see, this is not a perfect science, but this approach excludes the need for a 3rd party utility recovery company to pay and monitor, which keeps operations simpler for everyone involved (tenants, owner, and management).
Utility Bill Back for Single Family Rental Properties
Often, Single family rental property landlords will put utility accounts in tenants name. This sounds like less work because tenants pay the utility companies directly and the landlord has zero involvement; This works well, until there is a problem. As I've mentioned before, Property Management is really Problem Management, and this is a perfect example. The above arrangement sets up for problems that can be prevented. 
Sagareus DOES NOT put water / sewer bills in tenant names.  Instead, we receive all utility bills, pay them, and then "bills back" the tenants by adding the utility charge to the resident ledger. 
Utility Billing works like this:
  1. Sagareus receives the utility bill
  2. Sagareus pays the utility bill out of owner operating account
  3. Sagareus adds the exact amount to the tenant's ledger to post during upcoming rent cycle
  4. Sagareus uploads the utility bill to the ledger for tenant's review
  5. Tenant pays entire ledger amount
  6. Sagareus accounts for utility income as "Utility Recovery" 

Sagareus does this for 4 reasons:

  1. Reduces utility expense by collecting 100% of utility costs from the tenant(s)
  2. Allows management to watch for high usage, which indicates a leak or extra people living in the property
  3. Allows management to ensure utility bill is being paid regularly
  4. Reduces admin work of changing names between every resident

This appears to be more administrative work, but I argue it is much less administrative work over the long term. Updating utility accounts at turn over is one less task on an otherwise busy time, management maintains visibility on all accounts, and all bills are paid at all times, preventing a huge liability if tenant's default on the account. 

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Utility Cost Recovery Conclusion

Both Sub-Metering and RUBS ensure near 100% utility recovery, less fees to the service company. Sub-Metering requires an initial investment for system install, but offers a nice sales feature on the back end of your ownership. RUBS requires no set up fee. Both options require a 3rd party utility billing company to calculate usage and bill tenants directly, which must be monitored by owner or management.  Flat fee and Utility Bill back strategies are options for single family properties, both giving total control and visibility to the management team.

Depending on your property, goals, and whether or not you hire property management, neither option may seem worth the effort. In this case, a straight forward Flat Fee utility recovery charge may be your best option. 


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