Utilities: Tenant or Landord?....And a Way to Get The Best of Both Worlds!

There has long been a debate over which is the best course of action.  All inclusive vs tenant paying utilities?

To compare the two strategies, I thought I would weigh the pros and cons of each:

All inclusive:

Pros

-    Encourages energy conservation on landlord’s part (upgrading insulation, toilets, faucets, etc).  Yes, this costs money, but in the end, you have “forced” the appreciation of your asset.

-    Landlord does not have to worry about having the utilities in the tenant’s name, which can lead to non-payment issues.

-    Potentially attract more tenants as many would prefer an all-inclusive lease.

Cons

-    Typically higher utility consumption by tenant (I have heard from several reputable sources that consumption can go up by 35%(!!!!) when the lease is all-inclusive).  While this may or may not be accurate, it is reasonable to assume that utility usage will go up somewhat.  This leads to a decrease in cash flow.

-     Increased wear and tear on appliances, plumbing, etc as there is an increase in use when conservation is not the first thing on a tenant’s mind.

Tenant paying utilities:

Pros

-         Encourages energy conservation on tenant’s part.

-         Fewer variables in cashflow calculation and expected rate of return.

-         Less wear and tear on appliances, etc as mentioned above.

Cons

-         Can lead to non-payment issues if utilities are in tenant’s name.  In certain cases, utility companies have gone after the landlord after the tenant did not pay, even when the lease clearly stated that it was the responsibility of the tenant!!

-         Potentially reduce tenants interested in your property as mentioned above.



Photo Credit:  kitchenandresidentialdesign.com



Now how can I get the best of both worlds?  My solution has been Equal Budget Billing....Landlord Style!  Full credit goes to Ned Coates, a broker in the Guelph, Ontario area, who was the first to expose me to this type of utility structure.

How does it work?  Tenants pay all utilities; however the landlord pays the bills on the tenant’s behalf, meaning that all bills are in the landlord’s name.  The landlord collects the estimated monthly cost of utilities on top of the rent each month.   At the end of the year, the bills are reconciled and if the tenants paid too much, they get a refund.  If they paid too little, they owe the landlord.

Another tip is to make sure you have them pay a little extra than what you expect the utilities to be.  This way, there is a greater chance that the tenants will get a refund.  Tenants seem to be much happier paying a little more upfront and getting a refund, than paying a little less and getting a surprise bill and the end of the lease term J

Not only does this strategy ensure that the bills are paid, but it also helps to avoid having to chase down each tenant for his or her portion of a water, gas and hydro bill.  Yes, there is some additional management and book-keeping involved in this method, however for me; it has been well worth the effort!

Here is an excerpt from my typical student-rental lease.  Each of the 5 students pays $60 per month over and above the rent to cover utilities:

UTILITIES: Utility charges for the gas, electricity, water and sewer will be paid for by the Lessee.

****It is understood and agreed that the landlord pays the utilities on behalf of the tenant.  The utility charge is based on a monthly average usage.  The tenant agrees to pay $60 per month for the utilities to the landlord.  Once a year, there will be a reconciliation of the utility charges.  The tenant agrees to pay the landlord for any excess usage and the landlord agrees to reimburse the tenant for any overpayment.

***PLEASE NOTE THAT THIS DOES NOT MEAN THE RENT IS ALL INCLUSIVE***

Anyone else use this same approach?  Anyone else have different approaches?