Landlords have a few options for utilities; landlords can charge an all-inclusive rent, make tenants responsible for paying utilities, or choose to charge a monthly fee. Understanding the pros and cons to each option is pivotal to giving your tenants the best rental experience possible while being conscientious about your bottom line. While there is no one-size-fits-all solution, the best option for you and your tenants will align with your investment goals, target tenant demographic, and local market conditions.
Amongst all of the responsibilities that landlords and property owners usually have to juggle, thinking about utilities — let alone who should pay for them — is not usually on the top of their priority list.
When it comes to utilities, landlords can charge an all-inclusive rent, make tenants responsible for paying utilities, or can choose to charge a monthly fee instead. Making utilities part of the rent has several advantages. But lumping it into the rent fee also has some downsides.
Either way, when you rent out your property it’s important to clearly communicate with applicants how utilities will be handled and who has to foot the bill.
So should you or shouldn’t you include utilities? While there is no right or wrong answer to the question, we’ve got all the factors you need to take into consideration so you can make the right choice.
Benefits of Including Utilities
Attractive and Convenient for Tenants
Including utilities in the rent can help you attract high-quality prospective tenants and give your property a more competitive edge. It simplifies the rental process by providing a fixed monthly payment that covers all essential services. Tenants will also appreciate the convenience of not having to set up separate utility accounts and deal with multiple bills.
Predictable Cash Flow
When you include utilities in the rent, you can enjoy a predictable cash flow. Instead of dealing with fluctuating utility expenses, landlords can set a fixed rental rate that includes all necessary services. In turn, this stability can make financial planning easier and provide a steady income stream.
Easier Management
There’s no doubt about it. Managing utility accounts and payments can be time-consuming and administratively burdensome. Landlords who include utilities however, can streamline their management processes. Another perk of eliminating the need to handle utility bill collections, monitor payments, and deal with potential disputes between tenants and utility providers, is that it frees up time and resources, allowing landlords to focus on other aspects of property management.
Leverage Unique Tax Benefits
As a landlord or property owner, there are specific benefits available to assist you in maximizing your tax refund. If you assume the responsibility of covering utility bills for your rental property, you can take advantage of unique deductions when filing your taxes. Whether it’s water, garbage, gas, or electricity, each utility bill becomes a tax write-off, contributing to potential savings.
Fewer Late Payments
Offering tenants the convenience of a single monthly bill that covers all essential costs can bring them a desired sense of relief. When utilities are handled by the landlord, tenants can manage their finances more efficiently, simplifying their financial responsibilities.
By having fewer bills, tenants are more likely to pay their rent consistently and on time. Not only does this reduce the occurrence of late payments, but it helps ensure a steady flow of income for landlords, providing the necessary funds to cover essential business expenses like property repairs, maintenance, and taxes.
Downsides of Including Utilities
Higher Rental Costs
Including utilities in the rent means landlords must factor in the expenses associated with water, electricity, gas, trash, internet, cable, and phone services. As a result, higher rental rates will go into effect. And unfortunately, it may limit the pool of applicants for your rental property since some potential tenants may be deterred by higher costs.
Lower-Quality Tenants
Because higher prices may scare away some prospects, you risk attracting lower-quality tenants. When people find out utilities are covered, you may be more likely to get prospective tenants who may not be as responsible or conscientious, potentially leading to challenges in managing your rental property effectively.
Lack of Tenant Accountability
When utilities are included, tenants may not have a direct financial incentive to conserve resources. Sometimes, it can lead to excessive usage and higher utility bills, ultimately increasing a landlord’s expenses.
Additionally, tenants may be less motivated to report leaks, faulty appliances, or inefficient systems that contribute to wasted energy or water. If you plan to include utilities, be aware that you will have to carefully monitor usage and address any issues promptly to ensure that tenants do not take advantage.
Unpredictable Expenses
Utilities costs can fluctuate based on tenant usage, changes in rates, or external factors beyond a landlord’s control. It’s no surprise that landlords who include utilities may face challenges in accurately estimating and budgeting for these expenses. Without careful monitoring and appropriate rental pricing, landlords may find themselves in a situation where utility costs exceed the amount included in the rent, leading to financial strain.
Assuming Tenant Liability
If a tenant is responsible for their utilities and fails to make timely payments, the utility company can disconnect their services and pursue them for unpaid bills. However, if you have included utilities in the tenant’s rent, the entire liability now rests on your shoulders.
Even if the tenant stops paying rent and eviction proceedings begin, you remain obligated to cover the utility bills. Scenarios like these can lead to stress and impede on your ability to manage time-sensitive monthly expenses.
What Most Landlords Do
In some circumstances, landlords include water, sewage, and trash utilities in rent. It’s not uncommon for landlords to take responsibility for these, while renters are usually expected to pay for cable and internet. In other cases, landlords choose to make tenants responsible for all utilities.
To get a better idea of what local landlords in your area are charging for, consider checking rental listings which will indicate if they are or aren’t including utilities.
Pro-tip: If you discover that other landlords aren’t including utilities, you may want to intentionally consider including them in your listing to help you get ahead in the competitive market.
6 Laws That Apply To Rental Property Utilities
Landlord-tenant laws and regulations vary depending on the country, state, and local jurisdiction of where the rental property is located. To make sure you comply with them, it’s best to seek legal advice for accurate and up-to-date information.
Inclusion of Utilities
Laws may specify whether landlords are required to include certain utilities in the rent. For example, some jurisdictions may mandate landlords to provide running water, heating, and electricity in rental units.
Fair Housing Laws
Landlords must comply with fair housing laws, which prohibit discrimination based on protected characteristics such as race, color, religion, sex, national origin, disability, and familial status. These laws may also extend to aspects related to utilities, such as ensuring equal access and treatment for all tenants.
Utility Billing
If you choose to include utilities in the rent, there may be regulations regarding utility billing and charging tenants. Some landlords are required to follow specific guidelines for calculating and charging for utilities, ensuring transparency and fairness in billing practices.
Utility Shut-offs
Landlords are prohibited from arbitrarily shutting off utilities or interrupting essential services, even in cases of eviction. In addition, some laws state that landlords have an obligation to maintain utilities and address issues promptly to ensure they remain in good working order.
Safety Regulations
All states demand landlords to keep their rental properties safe. Adhering to regulations may include conducting regular inspections, ensuring proper installation and maintenance of electrical, gas, and water systems, and complying with fire and building codes.
Security Deposits
Laws often outline the handling of security deposits, including any deductions related to unpaid utility bills. Landlords may be allowed to deduct unpaid utility charges from a tenant’s security deposit, subject to specific limitations and requirements.
Addressing Utilities in Your Rental Lease
If you do choose to include utilities in the rent price, it’s important to clearly outline the responsibilities of both the landlord and tenant in the lease agreement. To effectively address utilities, consider checking with an attorney about incorporating the following three clauses into your lease:
Utilities Clause
Within this clause, specify which utilities are the tenant’s responsibility. Clearly state that tenants are required to have these utilities transferred into their names or activated for the duration of the lease.
Example: “The tenant is responsible for the activation and payment of the following utilities: [mention specific utilities here]. These utilities must be transferred into the tenant’s name and remain active throughout the lease term.”
Heat and Hot Water Clause
This clause ensures that the tenant understands their entitlement to access heat and hot water provided by the landlord. Since regulations may vary depending on the jurisdiction, clarify who will bear the cost of heat.
Although landlords are generally required to provide access to heat and hot water, it is common for tenants to be responsible for payment and setup.
Example: “The landlord hereby agrees to provide the tenant with access to hot water and heat. The tenant will be responsible for the payment of heat, as per applicable regulations and utility provider charges. The tenant is responsible for setting up and paying for their heat services.”
Lessee to Maintain Clause
Including a Lessee to Maintain clause is essential to prevent misuse or neglect of utilities by tenants. This clause emphasizes the tenant’s responsibility to properly utilize and maintain water, gas, and other utilities on the premises.
Example: “The tenant agrees to diligently and responsibly use and maintain water, gas, and other utilities on the property. The tenant shall not engage in any activities that may cause damage, waste, or excessive consumption of utilities. Any damages resulting from tenant misuse or neglect shall be the tenant’s responsibility for repair or reimbursement.”
By incorporating these clauses into your lease agreement, you establish clear guidelines for you and the tenant regarding payment, activation, and maintenance of utilities. Naturally, as with any binding contract, including your lease agreement, all additions should be reviewed by a licensed attorney before putting the clauses in place.
Choosing Which Route To Take
Ultimately, the decision of whether or not to include utilities in your rental properties should align with your investment goals, target tenant demographic, and local market conditions. With a careful analysis and thorough understanding of the pros and cons, you will be able to decide which choice is the right one.