Landlording isn’t easy. There is a lot to deal with, from rent collection to carrying out property repairs and maintenance and everything in between.
As a landlord in Centennial, Colorado, there is one question that often comes up when creating the terms of your lease – should you or should you not include utilities in rent?
Common utilities include heating, water, gas, and electricity.
Before deciding whether to include them in rent, you should first consider several things. First of all, are the utility meters separate? This will give you some sort of flexibility.
If not, then it may be difficult to determine who owes what. Some landlords often resort to taking the total costs of the utilities and then dividing it by the total number of tenants. This is usually unfair, as some tenants may be heavier users than others.
The second thing to consider is whether you have the financial ability to install or retrofit individual meters, which don’t come cheap. Retrofitting one device can cost you over $1,000, depending on the building.
The other thing you want to do is identify market trends. Essentially, you should try and find out whether other landlords in your market are doing it. Consider the level of renters in your specific area.
If there are minimal rental vacancies, then the pressure to include utilities in the rent may be considerably less.
With this in mind, let’s take a look at some of the pros and cons of including rent in utilities.
Why You Should Include Utilities in Rent
1. You can charge more.
Including utilities in rent will result in the ability to charge more. After all, you’d need to increase the rental price to cover your tenant’s utility bills.
Many landlords entertain this idea because of the ability to charge more than the costs to make an additional profit.
Taking on your tenant’s utilities means extra liability and extra headache. So, it only makes sense if you get some compensation for it.
Before deciding on the amount to increase your rent by, make sure that you do some research beforehand. Find out from other landlords or consider doing some experiments with different listing rents.
2. You may qualify for a tax deduction.
If you decide to include utilities in rent, that means the price of rent will go up leading to higher taxes.
That said, utilities are a property expense. They are genuine business costs associated with the management and ownership of a rental property. This qualifies them to be tax deductible.
Sadly, not many landlords in Centennial, Colorado understand how to go about filing their tax deductions. Consequently, they end up missing out on thousands of dollars on tax savings every year.
If you need help filing your tax deductibles, then consider hiring professional help.
3. You can set a utility ceiling.
This is very important.
Failing to put a ceiling on the utility bill can end up costing you a significant amount of money.
Take for instance that your Centennial tenant uses utilities worth $150 – this being a $50 increase from the $100 you normally pay for the month of January. Who do you think pays for the additional $50?
In most cases, you – the landlord.
To avoid this, you need to have a clause that sets utility ceilings in your lease agreement to protect yourself. If, however, you don’t specify anything in the lease, then that extra cost may be yours to take.
Here are two good options to consider when setting a utility ceiling on your lease agreement:
A) You can make your tenant responsible for the overage. The tenant will then become responsible for any cost that surpasses the ceiling. You may even state that the overage becomes unpaid rent, subject to late fees if not paid on time.
B) The other option is a bit more aggressive. You can make the tenant responsible for the entire bill if they go above the ceiling. To be fair, you can be lenient with the ceiling. If, for instance, the ceiling is $100, then the trigger price can be $120.
Why You Should Not Include Utilities in Rent
1. Your rental property may become non-competitive.
Some markets are extremely sensitive to price changes. It can be so sensitive that no tenant would be willing to pay a penny more.
Bear in mind that renters have several filter options when searching for homes in rental listing websites. That means that many may skip your rental advertisement simply because your property’s rent didn’t match their search criteria.
2. You take on an extra liability.
The tenant is usually responsible for their own utility bills. If they fail to make a payment, the utility company goes after them and not you.
However, if you decide to include utilities in the rent, that responsibility becomes yours to take.
In case you are thinking about cutting off the utilities to compel them to pay up, then be advised that’s illegal. It may amount to tenant harassment. Your tenant could sue you.
The only thing you can do is file for their eviction in court.
3. Your tenants could consume more.
It’s true for all-you-can-drink booze cruises, all-you-can-eat buffets, and – you guessed it – utilities when included in rent.
When people don’t have to pay for their consumption, they will naturally consume more. The bad news – you as the landlord will be on the hook for that all-you-can-eat bill.
Like every decision in property management, there are pros and cons. Depending on what your priorities are – these are 3 pros and cons to consider when deciding whether to include utilities in rent or not.