Ask Lucas 013: Should I Include Utilities in the Rent Price?

Ask Lucas : Q&A for Landlords

Summary:

Amy is wondering if she should include the cost of utilities in the overall price of rent, or manage them independently and then bill the tenants separately. Lucas discusses the options and provides a third (and better) alternative.

Full Transcript:

Lucas Hall: Hey, what’s up everyone? This is Lucas Hall from Landlordology and Cozy. Welcome to the thirteenth episode of Ask Lucas. It’s a bite sized Q & A show where I answer your questions about landlording and property management. The way this works is very simple. You can leave a recorded question on landlordology.com/ask-lucas and I’ll answer it in this podcast.

Today’s question is from Amy, but first, I want to tell you a little bit about Cozy. Cozy is an online rental management tool designed for landlords like you and me. I think it’s the best way for landlords to accept online rental applications, screen those tenants, order credit reports on them and then automatically, securely collect rent online. That last part is totally key because automation personally has changed my life in how I manage my own rentals.

The best part is, Cozy is completely free. That’s right, completely, utterly free. There’s no monthly fees, no transaction fees, no fees for properties. There’s no minimums, nothing. It’s completely free for landlords, so get Cozy at Cozy.co Now let’s hear from Amy.

Amy: Hi! My name is Amy and I’m a landlord in Tampa, Florida. I have a new lease with a new tenant coming up pretty soon and I want to build in some of the utility expenses related to the property. I’m not sure how to approach this. Should it just be a fixed amount in the lease or should I bill them monthly, separately?

Lucas Hall: Hey, Amy! It’s great to meet you. Thanks so much for your question. That is a valid one definitely for landlords because I myself have considered that question multiple times with a bunch of my properties and every time I renew a lease or look for new tenants on a property that I partially manage utilities, I consider what my options are.

The way I look at it is there are three options or three possibilities that every landlord should consider when pricing their rental and then also managing the utilities. One is do you just build it in? Do you manage the utilities yourself and then build it into the rent and then it’s just an all-inclusive deal for the tenant, which is a pretty sweet deal for them, I think.

Number two is do you add it on separately, so you have your rent price and then on top of that, you have some sort of mandatory utility fee that they have to pay, whether that’s a fixed price or a variable price, depending on what the bills are that month. Number three, do you make them pay for it? Do you tell them that they have to manage utilities themselves and put the utilities in their names?

Now, let’s talk about all three of them really quickly in a little more detail. Number one, do you build it in, right? Do you build in that utility fee into the rent? The pros is that it makes it very simple to manage your relationship with the tenant, but the cons are that it is often harder to find a tenant because your rent or your property will look like it’s more expensive than other comparable properties, even though it’s really not.

Other people might be advertising their property at, let’s say $800 for a two bedroom in your area, but yours is $1000 simply because you’ve got the utilities built in. On Craigslist or on Zillow or wherever you’re marketing, it’s not easily distinguishable whether or not the utilities are built in or not, so it’s usually in the text of the advertisement and not necessarily in the header or in that summary price. That will often hurt you or make it harder for you to find a tenant in the beginning.

I usually don’t try to build it in if my property is a premium property like it usually rents for the higher side of what the comparable listings are going for. Maybe I have granite countertops and a spa-like bathroom or something that just adds those extra features and so it does come at a higher rent, but I don’t want to build in that extra fee or those extra utilities because it will raise it even higher and put that delta between the other properties and make it even greater.

Number two, do you add it on separately? That’s the other feasible option, I think and that is where you basically just tell the tenants that here’s the rent price and then here’s the utility price and you owe them both to me by the first of the month or whenever your rent is due.

I do this myself when the utilities are very difficult to manage, for whatever reason. Perhaps the house takes an oil delivery or some weird water bill or something where it’s just I can’t get it in their name and so I manage it myself and then I charge them a flat rate or a monthly fee. I actually prefer the flat rate because it just balances everything out and they know what to expect and they can budget that into their finances and so there’s never any surprises, but it does take a little bit of extra front work for you to figure out what the average is per month over the year.

Then number three, which is my personal favorite and that is just to make the tenants pay for the bills themselves and to put the bills in their names. If at all possible, as a landlord, I prefer and recommend that people actually get the bills out of their name and put it on the tenant. Sure, they’ll gripe and complain and say why would you make me sign up for cable and internet? I’m only going to be here for a year and it’s well, yeah, that’s a year. That’s a year I don’t have to manage the cable bill myself.

There’s no reason why it should be in your name unless perhaps the water and sewer company forces you to put it in your name as the homeowner, but oftentimes, you can just mandate it in the lease that the tenants have to sign up for these accounts themselves. The other perk of doing that is if they don’t pay their bills, the cable company’s going to go after them and not you.

With that said, I think it is wise to actually monitor the bills and so every once in awhile, especially towards the end of the lease, just check in with those companies and just say, hey, I’m the homeowner. Is there a balance, especially ones that could put liens on your property such as a water and sewer bill. Anyway, I hope that helps.

In summary, try to get the tenants to put the bills in their names, but if not, then I would suggest not making it inclusive of the rent, but rather advertising what the rent price is and then somewhere in the body of the advertisement and when you meet with them in person, tell them that there’s a utility fee of X dollars every month as well in addition with the rent so that they’re not surprised when they sign the lease nor does it keep them from showing up on the property to see how great it is.

Thanks again, Amy. I hope that helps. Have a great day.