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Billing Back Utilities: What You Need to Know

billing back utilities

We love hidden value, and billing back utilities is one of the best and easiest ways to tap into hidden value. But what are the different ways to bill back utilities to tenants and should you even consider doing it? In this article, we cover these questions and more!

 

Hidden value is one of the most important components of The Fast FIRE System. 

It’s how you turn an ordinary rental into a cash-generating machine. It’s also how you significantly raise the value of your property by forcing it, rather than relying on the market to go up (because it might not). 

Utility bill backs are one of the best and easiest ways to tap into hidden value. It usually doesn’t cost you anything to implement, so it’s just money in your pocket each month. 

Before diving in any further, let’s give you a brief primer on utilities and how they are typically configured.

A Brief Primer on Utilities

If you’ve ever rented a home, you’ve probably encountered the different types of utilities. These are electric, gas, water/sewer, and garbage. Some properties don’t have gas and everything runs on electric. Examples of this are when you have electric water heaters and electric stoves instead of their gas equivalents.

As a rental property owner, you’ll encounter a number of different utility configurations and the first step to billing back utilities is to figure out how your property is set up.

Typically, electric and gas are individually metered. If they are individually metered, this is often billed directly to the tenant. If not, the owner usually pays. 

Water/sewer run together because water is metered while sewer usage is not. Most multifamily properties are not individually metered and therefore, there’s one bill, and this is usually paid by the owner. 

Garbage is sometimes billed separately from water/sewer, but it can also be bundled together with water/sewer. If it’s billed separately, it’s more likely that you can put it in the tenant’s name. If it’s bundled with water/sewer, it’s often a common utility and paid by the owner. 

 

But what are the ways to bill back tenants?

Ideally, the utilities are individually metered, which means the tenant will usually pay the utility company directly for whatever amount they use.

For whatever isn’t separately metered, you as the owner will be responsible. 

For example, we had a single-family home that we converted into a duplex. Because it was zoned single-family, there was no way for us to split any of the utilities. So electric, gas, water/sewer, and garbage were all paid by us (or really by our property manager on our behalf). 

The more common configuration is to have electric and/or gas paid by the tenant and the water/sewer paid by the owner. Garbage can go either way. 

Let’s assume the owner pays for water/sewer when discussing the following ways to bill back tenants. For this discussion, let’s also assume we are talking about a duplex. 

So, what are some ways this is split up among tenants? 

 

Even Split

One way is to split the water/sewer bill evenly between the two tenants in the duplex. So if the combined water/sewer bill is $100 per month, each tenant pays $50. The downside of this approach is that it doesn’t take into account the differences in usage between the two tenants. Let’s say one tenant is traveling for the entire month. Is it fair for them to have to pay $50 when they didn’t use any water/sewer? Clearly this approach has downsides. One benefit of this approach is that it is very easy for the property manager to implement.

 

Split Using a Formula

This type of splitting is when you approximate the usage of each tenant according to a formula. This formula might incorporate the size of the unit or the number of adult tenants. You can also combine these two and come up with a more complex formula. Similar to the “even split” option, this type of splitting doesn’t really take into account the differences in usage between the two tenants. It’s only a rough approximation.

We used this approach successfully at one of our properties. The way it works is as follows. You average out the utility bill for the last 6 months; let’s say it’s a total of $200 per month for water and sewer. We then charged a base fee of $50 per unit. For the remaining $100, we split the bill according to the number of adult residents. So if one unit has two adults and the other has three adults, the one with two adults pays $40 and the one with three adults pays $60. This $90 for the unit with two adults vs. $110 for the unit with three adults is supposed to reflect the difference in usage between the two units.   

 

Sub-Metering

In some cases, if each unit has a separate hot water heater, you can install a sub-meter. These days, sub-meters can be read without having to physically go to the property. These sub-meters are connected to the web and the meters can be read virtually at any time. Clearly this method of tracking usage is superior to the above two methods. The downside is the cost of installing these sub-meters and coming up with a system to read these meters and get this information to your property manager. 

 

To Bill Back or Not to Bill Back, That is the Question…

We often are asked by our readers whether they should bill utilities back or not. The two most common reasons against billing back are: 1) it’s not commonly done in the market and 2) the utility bill back will simply result in lower rents.

While these are good arguments, we feel that it’s always worth attempting to bill back. Now the caveat to this is whenever you have renters market, where there’s a glut of properties and not enough renters. In this type of market, renters have the upper hand and will favor properties that don’t bill back utilities. 

But assuming a healthy rental market, we feel that it’s always worth trying. 

For example, in the suburbs of Seattle, when we first started investing in the area, we were one of the first to bill back utilities. How do we know? Because our property manager told us that “nobody” bills back utilities. Well, it seems we started a trend because now everybody is billing back utilities. 

Also in healthy rental markets, we haven’t really seen evidence that rents are affected by utility bill backs. I think one reason is that renters generally expect to pay for utilities. Another reason is that renters, like many of us, aren’t trained to negotiate. Most renters don’t even think to ask the owner to cover the utility bill or lower rent. They generally just accept whatever is advertised. 

 

What is the value of billing back utilities?

There are two main sources of value with utility bill backs.

The first is the increased cashflow. In the Spokane market, water/sewer/garbage costs about $100/unit per month. So for a duplex, you’re looking at $200 per month. If you successfully bill back utilities, you’re looking at $2,400 a year of extra cashflow. For a $150,000 duplex that is cashflowing about $5,000 per year, billing back utilities increases your annual cashflow by about 50%!

But the cashflow is only one source of value. The other source of value is the forced appreciation. Forced appreciation is when you raise the value of the property by increasing the income of the property. For our Spokane properties, if you’re able to increase the net operating income by $2,400 per year, the value of your duplex goes up $40,000 (assuming a 6% cap rate). So instead of $150,000, your property is now worth $190,000. And all you did was bill back utilities! 

 

Conclusion

Every rental property owner should consider a utility bill back program for their rentals. The caveat is that the rental market may not support it, but in most cases, you won’t know unless you try. 

If you are successful, this could mean more money in your pocket every month or more equity in your property that you can tap by selling or by doing a cash-out refinance. 

Now you see why we love tapping into hidden value!

 

Interested in learning more about cashflowing rentals? We’re happy to announce that we’re approaching open registration for our Zero To Freedom Through Cashflowing Rentals Course! If you want to learn how to achieve financial freedom through real estate investing, click here to be put on our waiting list so you can be the first to be notified when course registration opens. Who knows, maybe there will be a bonus for those who sign up for the course through our waiting list?

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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