Managing a rental property can not only mean overseeing the brick-and-mortar structure but also the use of included utilities. Rental property utilities allow tenants to enjoy a comfortable life within the building. Utilities are a critical component of a successful property management business. Both you (the property owner) and the tenant should have a clear understanding of the type of utilities that are included in the rental agreement and who is responsible for their upkeep, repair, and payment.

What are Rental Property Utilities?

Rental property utilities may refer to the following:

• Electricity
• Hot Water
• Sewer
• Gas
• Heat
• Cable
• Internet
• Air Conditioning
• Alarm System or Security
• Recycling
• Trash Collection

In some rental properties, paying for the utilities is usually the responsibility of the tenant. However, which utilities are paid for by the tenant or the property owner will depend on the rental agreement. Some states also impose requirements on property owners regarding which utilities they are responsible for.

Why are Rental Property Utilities Important?

Besides ensuring the tenant’s convenience and comfort, utilities make a rental property much more attractive to potential tenants. Tenants want the assurance that their needs will be met, and any “extras” included in the agreement can make them see the rental property as a great deal. This is especially true if the utility appliances are already set up.

Utilities are also an important factor in many decision-making processes that you have to make. This is mainly because the use and maintenance of utilities are considered expenses and you must be able to manage both incoming and outgoing costs to keep the property feasible.

The agreement as to who is responsible for the utilities is also important because both parties need to be aware of which expenses each is accountable for. For example, if there is a problem, such as if the power gets shut off, the party who is responsible for paying for and getting the necessary repair and maintenance will be fully aware of his/her role. If the tenant is the one who pays for water, they would have to call the power company and make the necessary payments to get it turned back on. If you, the property owner, were responsible for the power bill, it would be up to you to figure things out.

For property owners, giving the responsibility of paying for and maintaining rental property utilities to the tenants will help ease some of your burdens, as well as cut down on your expenses. However, ensuring that utilities in a rental property are fully functional is important to keep the property in good condition. This is the reason why many rental owners keep the utilities in their names. This offers excellent control over the utilities and their functionality and efficiency.

Advantages of Including Rental Property Utilities in the Agreement

There are certain benefits to having the cost of rental property utilities included in the rent. First is a convenience for the landlord or property owner. When the bill for the utility is received, you can simply pay it out of the rent from the tenant. If the tenant is responsible for paying, you might have to send the bill to them, collect it, and make the payment. However, you could set it up in a way that allows the tenant to interact directly with the utility provider, which would simplify the process. 

In general, you may include utilities in the rent if a property does not have a separate meter. Properties that share a meter for utilities such as electricity and gas, for example, make it difficult to compute for actual usage. Additionally, proving the percentage of users may be difficult and could become a cause for disagreements between you and your tenant.

Including the utilities in the rent can also allow you to charge the rent at a reasonably higher price. With a reasonable buffer in place, you can enjoy a larger stream of revenue and receive a bit of an extra profit monthly while still easily paying utilities. Most tenants will not mind since they will prefer the convenience of having the landlord manage the payment for them. If tenants have to pay for utilities separately, they may have to put the bill in their name. Having the cost of utilities as part of the rent will expedite the process of moving and settling in for new tenants.

Disadvantages of Including Rental Property Utilities in the Rent

One of the downsides to charging rent inclusive of utilities is the effect of higher rent or its perceived cost on prospective renters. Tenants may not necessarily think about the cost of utilities being included in the rent and might assume that they would be paying more when in fact, the actual cost of the rent may be reasonable enough for the area. This may discourage some prospective renters.

Another disadvantage is the unpredictability of the cost of utilities. Rental owners typically use the historical cost of utilities in their area as a basis for computation. However, there are several that factors can affect how much utility companies charge. The level of usage by the tenants may also fluctuate on a monthly basis. This could affect the profitability of the property.

If you offer rent inclusive of utilities, you may also have to contend with tenants who get carried away on usage. Some tenants may think that since they do not have to directly pay for the utilities that they can consume as much as they want. If this happens, you might end up having to pay for the overages the tenant caused, utilities, and likely suffer from a narrow profit margin that month.

Lastly, you would have to deal with the hassle of paying the bills yourself, which means more work added to your other responsibilities.

Other Important Considerations Regarding Rental Property Utilities

Whether or not you decide to include utilities with the rent, there are certain key variables you need to consider carefully. These include:

Splitting Utility Costs

Landlords may decide to charge their tenants the cost of some utilities but shoulder the rest. For example, it is possible to have the tenants pay for electricity and water but not for cable. This will all depend on which arrangement is the most beneficial. You could also charge tenants a fixed rate and cover any remaining utility expenses. For example, if they use more power than expected one month, you would be expected to pay for anything over the fixed utility rate that the tenant pays.

Pricing

You may either charge a fixed or a variable price, depending on what you think is best for your business. A fixed price offers tenants a reliable and predictable figure and it can be convenient for you. However, fixed prices tend to be more difficult to predict, given the changes in the cost of utilities.

Variable pricing, on the other hand, allow you to charge the actual cost of the utilities but it tends to be a bit more difficult to manage.

Setting a Standard for Use

It is important for you to consider the standard allowance for the use of rental property utilities. This refers to the minimum and/or maximum allowable use (to a reasonable and fair degree) that the tenants should meet. You should then decide whether or not to charge a fee for excessive use or late payment.

Fluctuations

Fluctuations in the cost and usage can and will happen. For example, AC use will increase during the summer months while heating will be in high demand during the winter months. This is particularly a concern in areas that experience extreme weather conditions. If you decide to include utilities in the rent, make sure you take these factors into consideration, especially if you are thinking of increasing your rates due to seasonal fluctuations.

Negotiating Prices

There is a chance that you may have to negotiate utility rates with the companies that provide them. It is important to ensure that the final rate is fair and reasonable to both you and your tenant. Negotiations may also be necessary for the future, particularly if there is an increase in the cost of utilities.

Shared Utilities

In some rental properties, there are utilities that may be shared among different tenants. For example, some lights may have been installed and used in common areas such as hallways or foyers, or maybe a single water heater is used to serve several tenants. If this is the case, it is important for the landlord to disclose this information to the tenants and to include it in the rental agreement.

Tenant Responsibility

Tenants become responsible for the utilities on the day their tenancy begins. It is important to ensure that the tenant understands what is expected of them in terms of their usage and other responsibilities.

Advertising

To avoid confusion and unnecessary disagreements in the future, you should make sure that all ads involving your rental properties state what is and what is not included in the rent. Being clear and upfront about the details of the cost will help you steer clear of ambiguity and eliminate applicants who may not be able to afford the rental property. Keep in mind that while certain practices may be prevalent in the area where your property is located, it is still acceptable to negotiate the matter with your tenants.

Are Utilities Tax-Deductible?

Utilities are usually only tax-deductible if you, the property owner, pay for electricity, gas, heating, air conditioning, cable, satellite, internet, and/or water. If part of the rental agreement is for the tenant to reimburse the landlord for the cost of any or all of these utilities, the landlord may typically still file for the deduction. The reimbursement may then be reported as income.

At Specialized Property Management Birmingham, we know how to help you get the most out of your rental property investments. With years of professional experience, we can help you decide if it’s better for you and your property to include utilities in the price of rent, or to let the tenants pay them themselves. For more information, check us out online or call us at 205-417-1475 for a quote!