Utility Bills Affect Your Cash Flow

Before you purchase a property, your first step is to always run the numbers — by reviewing expenses, leases, and rent rates, you’ll be able to summarize how much that property will cash flow. As a landlord, we look to minimize expenses to increase profits so you will want pay close attention to what utilities are landlord paid as well as the ability for any of them be paid by the tenant in the future.

Let’s say you find a great multi-unit property, but the tenants aren’t paying utilities. You might wonder why a landlord would opt to pay the utilities on a multiunit. The are a few reasons why this happens but the main reason is the property is not sub-metered. For a utility to be paid by a resident the metering either must be a completely individual meter or the utility must be sub -metered. Sub-metering captures the exact usage from each utility, making individual and fair billing possible even when the utility is not actually separated between units. Sometimes, due to physical or financial reasons, a property cannot be sub-metered or individually metered so the landlord is left paying the utility.

Because utility usages heavily affects your bottom line, footing the bill for multiple units is less than ideal. Thankfully, there is an alternative to paying the bill or paying to install a submeter. Ratio Utility Billing or (RUBS) is a specific billing method used by property managers and owners to fairly distribute utilities to their tenants and eliminate the cost to owners.

Using RUBS to your benefit

The Ratio Utility Billing System — otherwise known as RUBS — works by using various data points to accurately and fairly distribute utilities to each unit for billing. This eliminates you, as the owner, from being responsible for these utility bills — adding to you overall year-to-date earnings. We will break down how it works and how you can use it to help increase your profits.

Important Factors

RUBS is typically used for water, sewer, trash and sometimes electric and gas. If all the units and tenants were exactly the same, you could simply divide the utility bill in half…but this is unlikely.

There are a number of factors to that need to be accounted for when determining how to fairly bill each unit. It’s important to remember that the objective of the RUBS formula is to get an accurate number so your tenants are willing and able to pay that bill. The RUBS method is about adjusting ratios to create a bill that encompasses all of that.

• Occupancy — While the number of tenants will affect how much that unit will be billed, it’s not exact math — Unit A, which houses three tenants, will likely not use three times the amount of utility usage compared to Unit B, which houses one tenant. A baby will not use as much water as an adult or grown child. Considering all these factors can prove to be difficult when trying to create a fair formula; reach out to your property management company or a utility billing service to help you determine a fair number. You can also use a formula like the example below.

  • Ratio Occupancy Method — this method uses a ratio to more accurately account for tenant usage, which in turn makes the tenant’s more likely to pay.

    • 1 occupant is billed as 1.0

    • 2 occupants = 1.6

    • 3 occupants = 2.2

    • 3+ occupants = 2.2 + .04 * # of additional occupants

• Square footage — A small studio apartment will not use as much electricity and as a spacious 3-bedroom. The type of utility matters hear too; electricity or gas would be greatly affected by square footage, so think about which utility you are assessing when determining how you divide the bill.

• Amenities — Amenities in each unit must be accounted for. If Unit A has a washer, but Unit B does not, you cannot charge them the same water bill — even if the units are the same size and the tenant count is the same.

• Common Areas — Typically, it is advised when using the RUBS method, the landlord would assume about 20% of the common area bills and allocate the remaining 80% to the tenants. This assumes one meter in use for both occupied and common spaces.

Another reason the RUBS billing method is great for owners is because it puts the responsibility back on the tenant to tell you when utility issues arise. If your tenant is paying for part of the water bill, and they find a leak, they will definitely let you know as soon as possible! They will not want to be responsible for the higher bill.

Introducing RUBS Billing to Your Tenants

Adding an expense to your tenant’s monthly or quarterly cost is never going to be something they are excited about. But, if you take the time to effectively communicate with them, you should find little resistance.

• Articulate how you calculated the costs to be fair — whether you, your property manager, or a third party utility calculating company came up with the formula you use, you should let your tenants know you put careful thought into ensuring the split is a fair as possible. Don’t be afraid to let them know which portions you would be contributing to as well.

• Give them time to process this new information — Typically, you can only begin charging for utilities once a lease is up or it’s renewal time. Be sure to give your tenants ample notice. I also recommend offering a middle ground - for example instead of a rent increase, the tenant assumes the new utility in lieu of the increase. On many occasions the rent increase is far less in profit then the reduction of utility expenses. Be creative in your delivery- it will help!

• Explain how they can reduce costs — If you are still met with resistance, remind them that because the bill is fairly split, they have to opportunity to be more conscientious of their usage, resulting in a smaller bill.

Ratio billing helps save the costs of separating utilities or sub-metering the utility and is widely accepted as a method to reduce exposure and expenses for landlords. Always check both state and local laws regarding ratio billing before using this method to ensure you are in compliance.

This information may not be used as a substitute for legal advice and you should consult your attorney for legal advice if you have any questions relating to this advisor guide.