Including utility costs with rent may add profits and sometimes reduce hassles for landlords. On the other hand, it could lead to higher-than-usual utility bills since tenants have less incentive to conserve energy.
So, should you charge tenants for utilities? The answer depends on the local market and your particular business model as a landlord. Rather than set a blanket policy, carefully consider the pros and cons of making your tenants pay for their own utilities rather than rolling them into the rent.
Rolling Utility Costs into the Rent: The Benefits
Including utilities in the monthly rent can offer financial rewards while eliminating some concerns about property maintenance.
Earn more. When you include the cost of utilities in the total rent price, you can pad the cost. Not only will you set the rate based on highest monthly bill you’ve seen for electric, gas, or water on the property over the past 12 months, you can also mark up the price because you are providing a convenient service to your tenants. In months when utility use is lower, you’ll make extra money.
Utilities are typically tax-deductible expenses against your profits. Rent prices will be higher if you roll utilities into the monthly rate, which can increase your earned income. But you can often write off those payments as a taxable expense.
Maintain responsibility for your utilities. Imagine this scenario: A tenant is responsible for utilities and fails to pay the heating bill. Their heat is shut off in the dead of winter, causing a pipe to burst. Even if you charge the tenant for repairs, it is still a situation you would prefer to avoid. Keeping utilities in your name can also save the hassle of changing them over if you lose a tenant.
Including Utilities in Rent: The Drawbacks
With all the profit potential, it may seem like a no-brainer to include utilities in rent costs. But the decision also has some potential pitfalls.
Your rent may appear higher than competitors in the area. When people are searching for apartments, they may compare rent prices without factoring in utility costs. Your apartment may seem pricier than competitors’ until tenants understand the value of having utilities covered.
If tenants don’t pay the rent, you’re still responsible for the utilities. A tenant facing financial difficulties may prioritize certain bills. For instance, they might opt to keep the electric turned on by paying that bill but try to negotiate with you to pay the rent late. If rent and utilities are included in one bill, they are likely not to pay you at all. Unfortunately, you must keep critical utilities—including heat, water, and electric—turned on even if a tenant is late with the rent. This means the money to pay those bills will have to come out of your reserves.
Renters use more when they aren’t paying. It’s only natural—tenants will be less conscious of energy use if their wastefulness doesn’t affect their wallets. You can avoid this scenario by placing a cap on the bill; the tenant would be responsible for any costs above the cap. You can also take steps to reduce utility costs while making your property more enticing to tenants by installing LED bulbs and a smart thermostat that automatically adjusts the temperature based on the time of day.
Choosing to roll utility costs into the price of rent may be a smart move in today’s highly competitive rental market, especially if you can take action to reduce those costs and increase your profit. If you have a property manager to handle the details—like paying the bills on time—it could be a win-win for you and your tenants.
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5 Arch Funding is not a tax advice expert, law firm or accounting firm. The content of this article is informational only and is not intended as tax, legal or accounting advice. Consult your own tax, legal or accounting professional for guidance.