The pros and cons of utilities included in rent

The most common utilities include everything your tenant needs to run a comfortable home. If you choose to include utilities in the rent, here’s what you will need to manage for your tenants:

• Water and sewer. Controlled by your local municipality, the water and sewer system refers to the water supply in the bathrooms and kitchen, the sewage system, and water that supplies appliances like the dishwasher or washing machine. 

• Electricity. Electricity bills can vary according to many factors—most importantly, tenant usage of appliances, lightbulbs, electric heating and cooling systems, and electronics. 

• Gas. Gas might be used to run your property’s water heater as well as power a gas stovetop. 

• Trash and recycling. Also controlled by your local municipality, waste removal can be shared garbage bins for a multifamily property or individual bins for a single family home.

• Internet, cable, phone. These are also considered utilities, but are almost always the tenant’s responsibility—even in properties where utilities are included.

There are several benefits to including utilities in the rent.

• Simplicity. Once you have utilities set up and automated, it’s a more seamless process for both you and the tenant. If you have any rental units with lease agreements on a month-to-month basis, including utilities makes move outs/move-ins a more streamlined process. It also allows a property manager to speed up tenant turnover therefore reducing vacancies.

• Higher quality tenants. Including utility costs can attract more responsible and higher-quality tenants who seek peace of mind with just one monthly bill that simplifies their budget. Often, the tenants that are happy to pay higher rent to have utilities included are easier to manage because they are looking for an easy, stress-free living situation. 

• Tax benefits. If you pay any utilities for the rental property you can deduct those expenses. Many landlords cover garbage, but you can deduct any utilities you pay for, including electric, water, and gas.

• Roommate relationships. There’s a lot less to argue about when roommates don’t have to divvy up utility bills. When utilities are included in the monthly rent, no one can make claims as to who owes more money, and good tenants appreciate that stress-free living environment. There also won’t be any issues about whose name will be on the utility account, or whose bank account payments will come from. Tenants can rest assured that they will never have to confront a roommate who doesn’t pay utility bills on time. 

While there are plenty of pros, it’s important to note a few downsides to having the rent include utility costs. Note that including utilities is not permitted for rent controlled properties.

• Rates can change. The rates can go up on any monthly utility at any time. That means you may need to increase the rent to offset rate hikes. One tip for getting a hold on extra costs is to set a cap on what dollar amount inclusive utilities cover. That way if the tenant goes over the amount, they’ll have to make up the difference. (This will also help curb excessive use—more on that below.)

• Predicting exact profits. In real estate investing, the fluctuating costs of utilities could make it harder to consistently and accurately determine the profits from your investment property.

• You’ll be liable. Whether or not your tenant pays you on time, the liability with each utility company will fall on you. It will be your responsibility to get bills paid on time and pay for any repairs.

• Less incentive for tenants to conserve. When utilities are included, and tenants have distance from the cost of monthly bills, they may not be as conscious of trying to conserve utility usage to save money and resources. For example, if tenants crank the heater in winter or AC in the summer, it could result in a significantly larger electricity bill. Setting a cap can help incentivize tenants to use utilities thoughtfully.

Bungalow offers tenant placement and property management services that keep your property fully occupied and well managed—helping you earn more rental income from your investment property. With Bungalow, homeowners earn up to 20% more rental income. Learn more about Bungalow.