When it comes to deciding whether you or your tenant should pay for the utility costs associated with your rental property, there are several options to consider. While many landlords choose not to pay any utility costs, others prefer to pay for everything while effectively passing on utility costs as part of the overall rent. Still others pay only for utilities that are unlikely to be overused, or for services that will keep the property in good repair, such as trash collection and regular landscaping.
Here are some factors to keep in mind when figuring out what's best for you and your property:
Let's assume for a second that you do pay for all the utility expenses at your property. That means all of the bills come directly to you, making it simple to keep track of, and account for, all costs associated with utilities, including electricity, heating and water. In other words, you can ensure bills are paid in full and on time, thus preventing tenants from having to deal with one or more payments each month.
However, some tenants tend to use considerable amounts of electricity, heat and water, which could add up for property owners and potentially cause them to lose money should they pay all utilities. The American Apartment Owners Association states having renters pay some utility costs can save you from losing on your return on investment.
On occasion, tenants will forget to pay utility bills---or, in some cases, skip out on paying them altogether after vacating a unit. Regardless of the circumstance, many utility companies will ultimately hold you responsible for paying the bill.
In fact, many utility companies only offer service to rental properties under the condition that the owner pays for missed payments. While this may seem unfair, the AAOA says the mandate puts more onus on owners and management companies to make sure they take utility payments seriously.
To counteract this contractual language utility companies require from landlords, it may be wise for owners and managers to put language of their own in a lease agreement with a tenant stating outright they are responsible for all utilities they pay individually. By doing so, landlords can legally protect themselves from becoming liable.
To keep track of how much energy and water tenants are using at a property, it's also suggested that owners install sub-metering systems at their property, which can accurately monitor exactly how much of a utility a renter uses.
The thinking behind these sub-meters is pretty simple: tenants who use substantial amounts of heat, water or electricity each month should be financially accountable for their extensive use, while renters only minimally using utilities should pay for their limited application.
According to the property owners resource website Landlord.com, the benefits of putting in sub-meters in your units can be tremendously beneficial, as they not only save you and tenants from being overcharged on utilities, but also because the units can add to your property's value, the site states.
One other chief consideration to take into account before ultimately deciding how to handle utility payments is to determine how other landlords in your area charge for utilities.
If you intend to pay for all utilities yourself and other landlords in your neighborhood or community don't, that may give you a leg up on the competition. Conversely, if you make tenants pay for all utilities and other property owners nearby don't, that may put you at a business disadvantage.