The majority of landlords choose not to cover the monthly costs of utilities like gas, electric, cable, or internet service. With a number of drawbacks for an investment property owner, that’s no surprise.
On the other hand, it may be an opportunity to make your rental properties much more appealing in a competitive market. Tenants love the idea of having utilities included with rent. It makes their monthly cost of living more predictable, and it creates the sense of saving money, even if they’re paying more in rent for the privilege.
It’s also worth noting that utility payments on rental properties are a tax-deductible business expense. So, this can reduce your tax burden. However, it must be weighed against increased taxes on larger profits if you charge higher rent because of the utility costs. This is one important reason to consult a tax professional specializing in real estate investment clients.
Additionally, if you own multi-family housing or multi-unit commercial properties with single meters, you have to pay the utility or take on the project and expense of installing individual meters. The hassle and expense can be considerable, depending on the size of the property.
There’s no one right answer to the question of whether you should pay for utilities at your investment properties. As with many of the details involved in the management of residential and commercial properties, it comes down to what makes the most sense for your situation.
To help decide if you’d like to offer included utilities to your tenants to gain a competitive advantage, here’s a quick look at the downsides you need to be prepared for, as well as some key ways to mitigate your risk.
Including Utilities with Rent at Investment Properties: The Cons
- It increases your base expenses on the property, cutting into profits.
- On the flip side of providing tenants with more predictable monthly costs, it introduces the uncertainty into yours.
- It means more bills to track.
- You’re responsible for making timely payments, rather than tenants. Even if they stop making rent payments, you must continue paying the utility bills. And for the record, it’s illegal everywhere in the US to have utilities shut off in a rental property in response to unpaid rent.
- Utility prices go up periodically, which negatively affects your profit margins with little advance notice. You can raise the rent in response, but only between leases, which may mean months or even years of absorbing the added cost.
- It encourages increased consumption. If you’ve been to an all-you-can-eat buffet or a brunch with bottomless mimosas, you probably know that removing cost incentives for reasonable limitations leads some people to over-indulge. Tenants may be less conscious of responsible use and cost-saving measures, which can lead to spikes in your expenses. It’s also bad news for the environment.
- While it makes your properties significantly more appealing to renters, it also makes them more expensive. This can make you less competitive on price in tight markets and prevent prospective tenants from finding your listings with price-filtered online searches.
Minimizing the Risks of Included Utilities at Rental Properties
As you can see, you accept some definite and potential downsides if you pay for utilities at your investment properties. But if you like the idea of offering this major benefit to tenants, there are certainly some ways to mitigate your risk.
- Charge more for rent. Make sure you have a solid grasp of the utility expenses at a new rental property. Track the average monthly expenses of each utility and factor them into your rent calculations. The more data you have from past bills, the better able you are to make precise calculations.
- Set reasonable utility bill ceilings in the lease. Create a fair cap on a monthly basis, accounting for increasing and decreasing seasonal use (generally, electric bills are considerably higher in the summer and winter due to air conditioning and heat usage). You can make tenants responsible for any amount over the cap, payable as additional rent, or you can even make them responsible for the entire utility bill any month they go over. The latter approach is more aggressive, but if you’re eager to counteract the above-mentioned “all-you-can-eat” mentality, this works well.
- Use automated bill pay. Set up automatic payments of utility bills through your bank or credit card. This eliminates the concern of forgetting or missing any payments, and prevents you from having to actively keep track of more bills. Also, check whether you have a credit card that gives award points on utility payments without added fees, and this can be a bonus to making automated payments on the card.
