is it a good idea to buy a property where all the utilities are included in rent? Does this drive the operating expences to over 50% of gross rents? Just trying to analize this one property I am interested in in my area. Also this is my frist investment property i am going to buy so i am a little nervous. Is it a good idea to add a clause in the contract that says something like" subject to verifying of all lease agreements , security deposits , and utility bills? I dont think I would be as nervous if i added this clause. thanks for your help
Johnnyg,
You definitely want to put in the contract that the security deposits in the amount of $$$ are to be handed over at closing. Also have the realtor get a print out of the last two years of the utilities. The print out will break down the utility bill month by month.
It’s better to not pay utilities, but there’s nothing wrong with paying utilities. If you do pay the utilities the rent increase received should cover the utility bills. You have to make sure that plastic is on the windows in the winter, and there is plenty of insulation in the attack and walls.
Johnny,
I NEVER buy properties when all the utilities are included. Gas and electric prices can definitely go up faster than the rent. In addition, what do you think an angry tenant does during the winter? (Hint: it has something to do with the thermostat, windows, and doors)
You should be nervous - VERY NERVOUS! Just say no!
Mike
Johnnyg,
There are plenty of investors who like paying utilities because then they know they are getting paid. I work closing with my tenants and have plastic on the windows and make sure when I buy a place that insulation is blown in the attic and walls if it isn’t in there already. It works just fine.
Propertymanager,
You own commercial apartments, don’t you pay the utilities? Or do you have base board heaters in every unit? I’m unsure why you feel so strongly about utilities.
One more bag to be left holding when the tenant skips town.
Elaborating on the topic here, how exactly does including utilities work as far as establishing a rent amount?
Just estimating seems pretty scary and unreliable for the exact reasons Propertymanager stated. I can understand not using them for 1-4 units, but many apartment buildings i’ve seen include utilities and don’t have "fixed utilities (ie:automatic thermostats,AC,etc.).
How do you manage it in your Apts. Propertymanager?
Mikes units are insulated with hay and the heat is generated from a burn barrel in the living room, hot crack pipes in the bedrooms and the SWAT/ SRT’s flash bangs tossed through the windows and doors.
Both of my apt buildings are separately metered and the tenants pay the utilities directly. When they don’t pay, they are 10 times more careless about leaving a window open in the winter or leaving the water running when they go on vacation (and seeking revenge in Mike’s case). With commercial tenants, they insist on paying their own utilities.
The only way you would be left holding the bag if the tenant left town would be if the landlord did not pay the utilities. That’s why some landlords like paying utilities.
The tenant pays you rent, you use part of the rent to pay utilities. If you aren’t paid rent (when the tenant skips town) you have no rent and no money to pay the utilities and are left holding the bag on both not just the rent.
It’s also a case of old ladies who keep the place heated to 130 degrees in the winter with the windows open and people who take a showers for 2 hours. To quote the first part of every sentence from Richard Davis… ‘At the end of the day’ you will most likely end up netting less because of the carelessness. People get smart faster when they are responsible for the bills.
Thoward,
All of my apartment buildings have separate metering for gas and electric. I do pay water in 4 or 5 buildings, but I plan to eventually put Badger meters in for all units. If the tenant doesn’t pay his gas or electric and skips town, that’s between the tenant and the utility company. I have absolutely no liability.
There have been MANY apartment buildings that I did not buy because the utilities were not separate. Also, I know other landlords that had their profit wiped out last winter when the natural gas bills increased dramatically.
Mike
If you do decide to buy a property that has the utilities included in the rent there is a few things you should know.
-
Your realtor can get you a print out of all the utilities paid broken down month to month for the past two years. This will help you estimate the utilities bills.
-
Put plastic on the windows and it is good to insulate the attack and walls whether you pay or don’t pay utilities.
-
After you own the place for a year you can be set up by the utility company to pay the same amount every month. They estimate what the total year will add up to and divid it by 12. So there is no fluctuations in your bills. That way you won’t be wiped out if the gas prices take a jump.
-
You need to have an efficient apartment whether you pay the utilities or not. Otherwise you will lose tenants
But whether the utilities are included or not should not be your deciding factor in not buying a property.
No, all that does is makes the payments even year-round…when gas (or electric as it did in CT) prices rise 50%+ your perfectly even annual bill goes up 50% a payment.
What I said is correct. If you disagree let me know and we can call any utility company and prove I’m right.
In the end what you need is a very efficient property. If you don’t insulate the attack and walls, the tenants will have to pay high utility bills and will find a new place to live. So make sure you have an efficient furnance and insulation.
So let me get this right…
Last year’s rate was say $0.10/kWH, I paid that all last year. Now if I call and setup a payment plan to pay say $100 a month based on the average of my last year worth of bills at $0.10/kWH. Next week the rates get raised to $0.15/kWH. Does that mean I can pay $100 a month forever even though rates just went up 50%? No way Jose.
Ok, I guess this is tough so I’ll leave it at this. If you pass up every great deal that comes along because the utilties are included then you will miss a lot of great deals.
It’s just a matter of opinion and preference. There are reasons to support both sides. I always wonder why more people don’t do what I do, go after the properties I do, see potential in things I do, etc. That’s why REI isn’t much of a cut throat industry, there are many avenues to follow. If you prefer to pay the tenants utilities, whatever floats your boat.
I dont like to include utilities because people love to take advantage of that. I just turned a 3 unit I bought and turned it into a 2 unit because it only had 2 meters. I onlly had to take a wall down and opened it up into a nice large 4 bedroom as opposed to a 3 and a 1 on the bottom floor. I also have to pay for water where I invest so I put a clause in the lease that any amount above a certain amount the tenant will be responsible for. I know of an investor that bought a property that did not have separate utilities o he had to pay for the heat. The tenant kept turning the heat up so he put a lock box on the thermostat. The tenant next proceeded to put bags of ice on top of the thermo box to cool the thermostat down so the heat would turn back on. Tenants will take advantage.
Wow, the ice idea is ingenious…
I have thermostates that I can set to limit to a certain temperature. 72 degrees is the max it will go. Even if there is ice involved 