Unit Residential That covers utility

General Real Estate Investing
1

I got private investors and can now buy big buildings! feeling like armed to the teeth, i am back into looking at multi-residential.

My questions is most of the building I see here covers the tenant utilities. As the price of utilities increase, will my net income get eaten away?

The projection of expense increase is usually 2% per year, but the projected rent increase is only 1.5% per year. So essentially the net income is decreasing

2

This is an excellent question!

There’s several answers…

I. Separate the meters.

II. Split the bill.
Back-charge the tenants, like trailer parks often do, if they operate on one meter.

Here’s what I do:

  1. Add up 12 months of utility bills (assuming normal occupancy)
  2. Add up the total square feet of leasable living space (exclude storage, common areas, etc.).
  3. Take the annual utility bill and divide it the net square feet of leasable space. This gives you the average utility cost per square feet.
  4. Multiply that average by the number of square feet per apartment, to come up with a baseline utility cost, for each apartment. Large apartments pay more. Smaller apartments pay less.
  5. On your invoice, provide statement including a rolling average of utility costs for the entire building. Graphs highlight the usage visually. It helps “sell” higher costs for a given month.

Issues to consider:

  • It assumes equal usage by each tenant. That’s never the case. One two bedroom unit might be occupied by two roommates who use very little energy. The other two bedroom unit might be occupied by a couple with a child who uses significantly more energy.
  • You are not likely to get broad participation in energy savings over any appreciable time, since the bills are averaged across the entire building, and no one tenant’s savings will show up on his individual bill.
  • You cannot charge more than what the utilities actually are.
  • This is why socialized utilities are MUCH higher than separately billed utilities.
  • Whatever bills you use to base your calculations must be available to your tenants to see. If they ask…

III. Do steps 1 to 4 above.
Add the average utility cost to the monthly rent, and market the units with “utilities included.”

Meantime, improve the energy efficiency of the building. I know, duh.

Insulate all exposed hot water pipes, including the water heater.

Consider installing insulated windows and doors (or just insulating the windows and doors).

*** Short of separating the meters, you can actually have your common areas, laundry, etc. all covered directly by your tenants as their portions of the utilities. Yay for you.

3

In that case you must split the bill and also have a resolution regarding that. There’s no problem that can’t be solve using compromise.