When you invest in a rental property, one of your most important — and challenging — decisions is setting the rental rates. This usually means comparing the current market rates against your property, while still bringing in enough income to meet your expenses.
In competitive markets, attracting tenants can be challenging, especially if you have an older property that doesn’t have as many amenities as newer buildings. One way to attract tenants is by including utilities as part of the monthly rent. As with any financial decision, there are pros and cons to taking this on yourself.
The Benefits of Including Utilities in Rent
Because utility bills can vary from month to month, many people are more than willing to sign a lease that includes electricity, heat, hot water, and other utilities in the price. There’s no need to budget for those expenses, and no shockingly high bills when they least expect it.
Tenants aren’t the only ones who benefit from including utilities, though. From a property owner’s standpoint, paying the utilities yourself can mean several things, including:
- Tax benefits. Although collecting payments for utilities increases your income, those bills are tax-deductible. They qualify as a genuine business expense that comes with owning and managing the property, and therefore can be deducted.
- Additional revenue. Including utilities can create a small source of extra revenue for you, increasing your profit. Although it’s not ethical to charge significantly higher rates than the utility providers, you can build in a buffer to the monthly charge to cover any overages. It only makes sense to round up, since paying more to the utility company than you collect isn’t smart business.
- Consistency. When you provide utilities like cable television or internet service, you don’t have to worry about individual tenants scheduling installation, and making unapproved changes to the building. You have control over what’s installed where and how, reducing the likelihood of damage or other problems in the building.
- Simplicity. There may be times when the utilities need to be charged to the property as a whole, rather than single units; for example, a single family home that is converted to multiple units is likely to have a single furnace or oil tank. In this case, your options are to include the utilities in the rent, charging each tenant equally, or calculating and sending out additional bills each month.
The Drawbacks to Including Utilities
The major drawback to including utilities in the rent is the fact that it can potentially increase your costs — significantly. When they don’t receive a bill each month, some tenants may not be as likely to conserve resources, leaving you with big bills. And you’re on the hook for those bills even if the tenant is late on their rent or doesn’t pay at all.
And while taking responsibility for utilities can increase profits, it can also take a bite out of your earnings if utility rates increase. Unless it’s included in the lease that the monthly payment can be adjusted in accordance with utility rates, you’ll have to wait until the next lease renewal to start charging more. In the meantime, you could lose hundreds, if not thousands, of dollars.
There’s also a school of thought that not including utilities can attract more responsible tenants. Many people who look for rentals that include utilities may have poor credit, or be unable to open utility accounts in their own names because of poor payment history. This isn’t always the case, of course, but it can be a concern.
Managing Utilities as a Landlord
Some landlords opt to take a hybrid approach, including some utilities and leaving others to the tenants. When this is the case, it’s vital that the lease outline what are considered utilities and what will be covered by the landlord. In many cases, the only utilities included may be heat and hot water, but it depends entirely on the property and owner preference.
Protecting yourself when covering utility costs also means specifically outlining what is and isn’t included. For instance, consider placing a cap on the utilities, and noting that any overages will be billed to the tenant. Caps should be adjusted seasonally. Rules and guidelines for utility usage should also be outlined in the lease. For example, tenants washing their cars will drive up your water bills, so you may wish to prohibit those activities.
Keep in mind that you cannot charge for utilities based on the number of people living in the rental, as that can be seen as discriminatory to larger families. However, you can adjust some utility charges, like heat, based on the size of the rental. Whichever way you go, the most important thing is to be consistent, fair, and reasonable, and communicate clearly to prevent misunderstandings and excessively large bills.