April 21, 2023
4 Questions to Ask About the Utility Billing System Before Investing in New Property
When acquiring new multifamily properties, don’t overlook the utility systems (or lack-there-of). Here are some questions to keep in mind about utility billing while inspecting any new potential multifamily investment.
With any property investment, it’s important to have a full picture of what you’re investing in. In the case of multifamily or commercial property investment, the utility billing infrastructure has a big impact on your overall net operating income (NOI). Despite that, many investors overlook utility billing as they complete their due diligence audits to proceed to purchase the property.
This oversight introduces risk. Behind mortgage and taxes, utilities represent the largest monthly cost for multifamily property investors. To make matters more complicated, it’s a variable cost that depends on the utility usage of your residents.
If you want to ensure you fully recover that cost despite usage, you need a utility billing system in place that works. By glossing over the utility billing system as you do your due diligence, you could end up with a system that could ruin the NOI of the property.
If you want to avoid those problems, here are some questions to keep in mind as you inspect potential new property investments.
Question #1: Is There a Utility Billing System in Place?
First things first: make sure there is a utility billing system in place.
This could be one of two things:
- A submetering system, where each individual unit has its own utility lines and submeters to read usage. This setup is the most ideal utility billing system because it allows you to determine the exact usage of each unit and bill residents accordingly.
- A ratio utility billing system (RUBS), where utility costs are proportionally allocated to tenants. This method is used in some properties (especially older ones) where submetering may not be possible or cost-effective.
A submetering system and RUBS are both good ways to recover more utility costs.
If one needs to be put in place, working with a utility billing partner can help make that process easier while ensuring that you get the best system for the property.
Question #2: Are the Submeters Getting Full and Accurate Reads?
When working with a submetering system, you need to make sure each unit is getting a full capture of the usage for that unit and that unit alone.
While it may not be feasible to check each unit to make sure it’s getting a good read during the sale of the property, it’s still important to check if the current owners have had any issues in the past.
Take any issues into account as you move to purchase the property. You might be able to use these issues as part of the negotiation. Regardless, you’ll need to know where to start repairing the submetering system once you’ve purchased the property.
Question #3: Are There Any Leaks?
Leaks can and do go undetected, especially in larger multifamily buildings or complexes. This causes two problems:
- Unrecovered costs: You can’t bill back the expenses of a leak between the master meter and a submeter, which means you can easily lose thousands of dollars or more in cost recovery.
- Inaccurate bills & frustrated tenants: A leak could be incorrectly attributed to a resident’s usage. Over time, that resident will notice and likely become fed up with paying a higher monthly utility bill, and they will put off paying the bills to dispute them. If left unresolved, this could ultimately lead to turnover.
Either way, undetected leaks can become a problem leaving you saddled with more utility costs to pay each month – that’s not including any building damage the leak could have caused.
Like the question above, you will want to take these issues into account if you plan to move forward purchasing the property. Also be prepared for unforeseen issues popping up after you purchase the property. Working with a utility billing expert with access to rich analytics on the property’s utility billing system can help you spot potential leaks the previous owners may have missed.
Question #4: Are Residents Paying Their Bills?
A successful utility billing system is the one that recovers as much utility cost as possible.
If residents aren’t paying their bills on time and in full, then you and your investors will be the ones paying that extra utility cost when the payment is due with the utility.
As you investigate any potential property investment, it’s important to determine how reliable the current residents are with paying their bills. If they aren’t, is that something you would be able to easily change?
Of course, nobody likes to receive a bill; however, there are ways you can bill residents that will lead to more people paying on time. Generally, that means issuing fair and defensible bills at a predictable cadence while providing a positive tenant experience.
Conclusion: Don’t Gloss Over Utility Billing
You want to make wise investments. Of course, no property comes without its own set of problems. Being able to take those problems into account on the final sale price, plus having ways to address the problems once the property is in your possession, is the goal.
The same goes for the utility billing system. Taking the time to make sure it can fully recover those utility cost will go a long way to ensuring a full return on your investment with reliable income in the future. And working with an expert utility billing consultant can help you make those determinations.
Expanding your multifamily investments? Having a utility billing partner in your corner can recover more utility cost and help you maintain the value of your property investments. Get in touch with Synergy today.