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How to charge tenants for utilities: A landlord’s guide

by Jeff Rohde, posted in Investment Strategy

As a real estate investor, landlord, or property manager, you may be wondering how to charge tenants for utilities. 

This post will discuss the different ways to charge tenants for utilities and best practices for doing so. It will also provide tips on offering a utility allowance and the best methods for keeping track of rental property expenses and income.

Key takeaways

  • Charge tenants for utilities in a way that is fair and easy for both parties.
  • Utilize different methods for charging tenants for utilities, depending on the situation.
  • Offer a utility allowance to help renters cover costs.
  • Keep track of rental property expenses and income with ease.


When is it customary to charge tenants for utilities?

As a general rule, tenants are responsible for paying for utility services in the homes they rent. However, there are some circumstances in which landlords may charge tenants for utilities

Typically, this occurs when there is a master utility meter for a multifamily property. In these cases, the landlord may charge each tenant a portion of the overall bill based on the number of units in the building. This provides a simple approach for apportioning utility costs..

Tenants typically pay for their own utilities in single-family rental (SFR) homes. Houses generally have individual utility meters, and paying for utilities directly incentivizes tenants to use them more responsibly. Having tenants pay for their own utilities also allows landlords to keep rental prices lower overall. 

However, in some cases, landlords of SFRs pay for utilities directly and charge tenants for the utility bill. This usually happens when the property is located in an area with high utility rates or when the landlord offers amenities like cable or internet service as part of the rental package.

Of course, landlords must always follow state and local laws when it comes to charging tenants for utilities. There may be limits on how much landlords can charge in some jurisdictions or restrictions on which utilities can be included in the bill. Landlords should consult with an attorney or other professional before implementing any sort of utility charge.


Electric bill charges paper form on the table

How to charge tenants for utilities by including the cost in rent

One method many landlords and property managers use to charge their tenants for utilities is including the estimated cost in the monthly rent. 

This can simplify things for both landlords and tenants. Tenants know exactly how much they need to budget each month, and landlords don’t have to track multiple charges when billing the monthly rent. 

However, landlords may end up paying more in utilities than they would if they billed tenants separately. In addition, some tenants may be reluctant to conserve energy if they know they’re not directly responsible for the bill. 

There are important things to keep in mind when including utilities in the rent. 

First, clearly specify which utilities are included in the rent price. This will help you avoid misunderstandings. Second, keep in mind that some utilities may be more expensive than others. Ensure you’re not overcharging tenants for utilities they’re not actually using. 

Finally, remember that you can always change the way you charge for utilities when the lease comes up for renewal or when you rent to a new tenant. There’s no need to stick with a system that isn’t working for you or your tenants.


How to charge tenants for utilities by billing them separately

Many landlords choose to charge tenants for utilities separately from rent, and this method is often seen as a smart way to manage a rental property. 

Billing utilities separately allows tenants to control their own consumption and can help you increase potential returns by reducing operating expenses. This can be done by installing a meter for each unit of a multifamily building and billing tenants according to their usage.  

Charging tenants for utilities has a number of advantages for landlords and real estate investors. 

First, it can encourage tenants to be more conscientious about conserving energy and water. Second, it provides revenue to offset the costs of utilities.  

When billing for utilities separately, it’s important to do so fairly and ensure that tenants understand the terms of the agreement before signing the lease. This can help you avoid confusion or misunderstandings.


How to offer a utility allowance

Many landlords charge their tenants for utilities, but some landlords opt to offer a utility allowance instead. 

Offering a utility allowance can help you attract and retain tenants. Tenants who know they won’t be responsible for paying utilities often see this as a valuable perk, and it can give your property an edge over competitors. 

Additionally, offering a utility allowance may keep tenants happy and reduce turnover. When tenants receive a utility allowance, they may be less likely to complain about high bills or face disruptions in service. 

Finally, offering a utility allowance can help you control your expenses. When tenants are responsible for paying their own utilities, they may be more conscientious in an effort to save money. 

Landlords should follow best practices when offering a utility allowance: 

  • Base the allowance amount on actual expenses. 
  • Clearly state the allowance in the lease agreement. 
  • Keep meticulous records of utility bills and expenses. 


Tips for tracking utility expenses

You have a few options for tracking utility and other costs:

  • Use a spreadsheet. This can be a simple Excel spreadsheet or a more sophisticated rental income and expense worksheet
  • Use bookkeeping software, such as QuickBooks or FreshBooks. 
  • Use Stessa, free software specifically designed for tracking rental property expenses and income. 

Spreadsheets are generally the easiest to set up and use, but they can be less efficient for tracking large amounts of data. Bookkeeping software can be more time-consuming to set up but can offer more features and flexibility. 

Rental property software is typically the option that both novice and sophisticated investors use to make more informed decisions about their property portfolios. This type of software can be a valuable tool for keeping tabs on finances and ensure that properties are running smoothly. 

Rental property software can help landlords accurately charge tenants for utilities using features that can track how much water, electricity, or gas each tenant uses

Additionally, rental property software can help landlords track maintenance and repair costs and rent payments. Stessa, a Roofstock company, can be used with an unlimited number of portfolios and rental properties to automatically track income and expenses, get 24/7 visibility into portfolio performance, and put rent collection on autopilot. All transactions flow seamlessly into Stessa, so generating real-time reports is even easier. 

Ultimately, the best system for tracking rental property expenses depends on the landlord’s or investor’s specific needs.


Wrapping up

There is no one-size-fits-all answer to the question of how to charge tenants for utilities. It depends on the specific property and situation. However, landlords should make sure that tenants understand the terms of the agreement before signing the lease.


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