July 29, 2021
How to Manage Rising Utility Expenses: A 3-Pronged Approach
Utility expenses always seem to be rising. And as a landlord’s largest non-fixed expense, this can wreak havoc on profitability. In this post, we cover a three-pronged approach landlords can take to better manage rising utility expenses—without negatively affecting competitiveness in the rental market.
Two factors go into utility expenses:
1. The rate (cost per unit, gallon, kilowatts, etc.)
2. The usage (volume of utility consumption)
So, landlords who are trying to stay competitive by fixing rent with utilities included end up losing because there’s simply no safeguard in place when expenses rise. However, there are things you can do to manage rising utility expenses and stay competitive.
How to Manage Rising Utility Expenses
AUDIT UTILITY BILLS
First, there’s always a chance that the utility companies are charging you too much.
Even if the rate stays the same, they tend to pack on other fees or charges to increase the overall utility expense. Or, they could be billing you the wrong rate entirely.
Professionals can examine your rates to see if you’re being billed the right one and help you make it back if you’re not.
The second part of the equation is overall usage. Of course, you can lower your utility costs by using less utilities. While you may not have much control over how much your tenants use, there are ways you can manage consumption and ensure there are no leaks or inefficient infrastructures skewing consumption rates.
It’s all about getting ahead of any problems on the front end so you don’t have the extra utility expense in the first place. Making sure there are no leaks on the property, cutting down on access gardening, installing low flow toilets and following other conservation methods are all important to help cut down on consumption.
BILL BACK TENANTS
Billing back tenants for real usage guarantees you’re recovering utilities that were actually spent. This is the most direct way to truly get your utility costs under control. But it begs the question for landlords already offering or planning to offer flat rent rates with utilities included: how do you stay competitive?
The reality is that it may not be feasible to bill residents for utilities in your rental market. If all the rental properties around you include utilities in rent or as a flat fee, renters won’t go for your property over your competition.
So, if the market does not allow you to separate rent and utilities, the key is conserving consumption. You could also play with the numbers: See how much you are able to lower your rent so you can separate utilities (getting rid of the risk and uncertainty of the non-fixed cost) but still look desirable to potential renters.
If it does make sense in your market, billing back tenants is the most effective way to manage utility costs because you as the landlord are no longer bearing the full brunt of the utility bill.
Billing back requires you to actively track usage. When you have this information at hand, you (and your tenants) can manage rising utility expenses by:
#1. Identifying Possible Leaks
Real-time data on utility usage allows you to spot any spikes that might indicate a leak or other infrastructure issue.
You might be wondering why you should worry about leaks if you’re not the one paying the bill. Well, this isn’t an accurate train of thought. There’s a limit to how much you can charge tenants for utilities. So, if the charge is excessive due to a leak, tenants aren’t going to pay it. It’s in everyone’s best interest to conserve and stay on top of any issues.
#2. Incentivizing Conservation
When residents know how much energy they’re using, and they’re the one footing the bill, then they’re incentivized to use less. This is not only great for your property but great for the environment.
In fact, when tenants have full ownership of their utility bill, they tend to drop their usage rates 25 – 35 percent.
#3. Increasing Profitability
Utility expenses are a bottom-line killer. When you bill back to tenants, utilities are no longer a non-fixed cost. Therefore, your month-to-month income becomes more predictable and your business more profitable.
Under the right market circumstances, the benefits of billing back are clear. So, how do you implement a utility bill back program ?
Utility submetering allows property owners to allocate utility costs fairly among tenants by measuring each unit’s true consumption of water, gas or electricity. This is the ideal solution for billing back your tenants
With submetering, you install a meter between the master meter for the property and each tenant’s unit. This provides accurate data for every tenant’s consumption for every utility. And with this precise consumption data, you can bill back tenants for exactly what they consume. Tenants can also see their consumption data, so they can adjust their usage to fit their lifestyle and budget—a win-win for both landlord and tenants.
Ratio Utility Billing System (RUBS)
RUBS is a billing method that proportionally allocates utility costs to tenants. This is done based on an industry-accepted formula that takes into account unit size, layout, occupancy and more. It’s used to bill tenants for water, gas, electric, trash, cable and other services.
RUBS is a great alternative for landlords looking to bill back tenants but don’t have the capability or upfront cash to implement a submetering system.
Utility expenses can be unpredictable and difficult to manage. But by auditing bills for errors or hidden fees, focusing on conserving consumption and billing back tenants based on real usage, you will be able to get your utility expense under control.