Last week, we shared how to improve your NOI (Net Operating Income). This week, I’ll share yet another strategy to improve your NOI.
Focusing on the most common utility expenses, garbage, water, and sewer, here are six tips to reduce the expense of landlord-paid utilities:
Tip #1 Verify water expense during the due diligence stage
Before you buy a property, be sure to do this during your Due Diligence Period. You can also download our Due Diligence Checklist here.
With multi-families, it is often common to have a single meter for water and sewer, making the water bill the owner’s responsibility.
When you’re not footing the bill, you’re less likely to be money conscious. Thus, when an owner is paying the water bill, the tenants are less likely to conserve water. As investors, we need to look at ways to reduce the bill.
But before we can consider the options for reducing this utility expense, we need to confirm these two things during the due diligence period:
- The number of meters/connections
- The average monthly bill expense
Like we often say: trust but verify. It is not enough for the listing agent or seller to state that tenants pay all utilities. You must confirm this. You, the investor, are responsible for this—not the agent.
How do you confirm tenants pay all utilities? Confirm all three:
- In the lease agreement
- The owner’s P&L (profit and loss) statement, and
- The utility company.
Next, we need to verify the expense by reviewing 12 months worth of bills.
Quick example: an investor client of ours was purchasing an 18-unit apartment complex that had one single water meter. The owner provided a P&L statement that showed the water bill averaging $2,000 per month, and the investor used that figure in their analysis.
However, in only a few months of owning the property, he found the actual bill to be much higher—closer to $3,000 per month! Had the investor verified with the utility company, he would have used the actual amount in his calculations and possibly negotiated a lower purchase price with the seller.
Even if the tenants are responsible for the water bill, it is to your benefit to understand the average water bill cost. Why? A high water bill may make rent increases a challenge.
Tip #2 Water conservation
Even if the units are separately metered, and the tenants are responsible for the bill, it would benefit everyone to control the water bill through water conservation efforts.
There are some very inexpensive ways to do this. If you are responsible for the bill, then a water conservation plan is a must as this expense directly affects your cash flow and property value.
Here are five ways to conserve water:
- First, be sure your property has no water leaks. An easy way to determine this is to turn all of the water off and ensure no water is being used. How? Locate the water meter, remove the box lid, and watch the water meter. If the hand is moving at all, you either have a leak or it could be a faulty meter.
- Install low-flow aerators on all sink faucets.
- Apply low-flow showerheads, which will reduce water usage by 25%.
- Install low-flow toilets (look for the WaterSense label), which will reduce water usage by 40-50%.
- Check first with the water district as many offer these free of charge.
Tip #3 Sub-meter the water
Submeter individual units by installing submeters for each unit. Then, have a company read the usage and dividing the bill amongst the tenants based on their water usage. Alternatively, some companies offer this service and will bill the tenants directly.
Not all municipalities allow submetering, and it may be cost-prohibitive in some areas.
Tip #4 Garbage
Seven ways to reduce garbage-related costs:
- Verify the current rate paid for by the seller.
- Consider if other companies are servicing the area that might offer better rates.
- Consider upgrading to a larger dumpster versus paying for individual cans.
- Adding recycle bins may reduce the amount of garbage bin/dumpster size needed.
- Change the pick-up frequency if the bins are not always full.
- If you suspect that non-tenants are creating full bins, install a lock with access to tenants only.
- Negotiate the rates by adding an auto-pay option.
Tip #5 Create a utility bill back program
Passing the utility bills back to the tenants is a great way to increase your NOI. But do know that certain municipalities have specific requirements for what cannot be billed back. Check with a local property manager for your market’s laws. Also, it is worth noting that utility bill back is not common in some markets, so be sure to also discuss this with your property manager.
- Flat fee bill back. With properties with the same unit sizes and the same number of bedrooms and bathrooms, a flat fee bill back is my preferred method. It’s easy for both tenants and landlords because it’s the same amount every month and paid monthly. The downside is it may or may not cover every month’s bill, leaving the owner paying the difference.
- Implement RUBS (ratio utility bill back system). RUBS divides the utility billing among residents based on set criteria. Criteria can be based on the square footage, the number of occupants, bathrooms, etc.
- Splitting the bill. Another option for a smaller property might be to have the tenants reimburse for actual utility costs by dividing the bill up between tenants.
Tip #6 Earn points on utility bills
The final tip would be to earn points on landlord paid utilities either for cashback or to fund future travels. Whenever we have a recurring bill, I always set up auto-pay to save time and earn points for future family vacations. Sarah also does this and earns more than 3,000 airlines miles every year with this simple trick.
We only have a few properties where we have to pay the water/sewer bill. Those bills are on auto-pay with my Alaska Airlines Visa card, allowing us to accumulate airline miles. Not to mention, it’s much easier to have one credit card dedicated to our rentals. This saves time when it comes to doing the bookkeeping.
Each year we earn enough points to fly for free, allowing us to achieve a return on spend. Yet another benefit to owning rental properties.
Have you increased the value of your properties by reducing expenses? Tell us how.