Who Should Pay Utilities When Renting? A Guide for Landlords

When deciding whether you or your tenant should pay for the utility costs associated with your rental property, several options exist. Some landlords choose not to pay any utility costs, while others prefer to cover everything and effectively pass on utility costs as part of the overall rent. Still, others pay only for utilities that are unlikely to be overused or for services that will keep the property in good repair, such as trash collection and regular landscaping.

Here's a comprehensive guide to help landlords, property owners, and prospective property owners understand how to determine who should pay for the unit's utilities.

Expense vs. Control

Paying for all the utility expenses at your property means all bills come directly to you, simplifying the process of tracking and accounting for costs. This keeps bills paid in full and on time, preventing tenants from dealing with multiple payments each month.

However, tenants might use considerable amounts of electricity, heat, and water, which could add up for property owners and potentially cause them to lose money. The American Apartment Owners Association (AAOA) suggests that having renters pay some utility costs can help you avoid losing your return on investment.

Liability for Unpaid Bills

Sometimes, tenants forget to pay utility bills or skip out on them altogether after vacating a unit. Many utility companies will ultimately hold you responsible for paying the bill. Some utility companies only offer service to rental properties on the condition that the owner pays for missed payments.

To counteract this, include language in your lease agreement stating that tenants are responsible for all utilities they pay individually. This can legally protect you from becoming liable for unpaid bills.

Metered Utilities

Installing sub-metering systems at your property can accurately monitor how much energy and water tenants use. Sub-meters keep tenants who use substantial amounts of utilities each month financially accountable for their extensive use, while those who use minimal utilities pay accordingly. Sub-meters can save you and tenants from being overcharged on utilities and can add value to your property.

Local Market Practices

Consider how other landlords in your area handle utility payments. If you cover all utilities and other landlords don't, you might have an edge in attracting tenants. Conversely, if you make tenants pay for all utilities and other landlords cover them, you could be at a disadvantage.

Choosing Between Different Utility Payment Models

Choosing the right utility payment model for your rental property can significantly impact your bottom line and tenant satisfaction. Each model has its advantages and drawbacks, and the best option depends on your property's unique circumstances and your management style.

Below, we explore three common utility payment models: all-inclusive rent, tenant-paid utilities, and partial utility payment. Understanding these options will help you make an informed decision that balances control, cost, and tenant appeal.

All-Inclusive Rent

In this model, the rent includes all utilities. Tenants appreciate the simplicity, as they only make one payment each month. This model can attract more tenants, especially those looking for a hassle-free living arrangement.

However, you risk tenants overusing utilities since they don't see the direct costs. To mitigate this, set reasonable usage limits and include clauses in the lease to charge extra for excessive usage.

Tenant-Paid Utilities

Having tenants pay for utilities directly means they are more likely to conserve resources, reducing overall consumption. This model also protects you from fluctuating utility costs.

Specify in the lease which utilities tenants are responsible for and provide guidance on setting up their accounts with utility providers. Consider including a clause that requires proof of utility account setup to avoid service interruptions.

Partial Utility Payment

Some landlords cover certain utilities, like water and trash, while tenants pay for electricity and gas. This model offers a balance, providing some control over utility usage while still appealing to tenants. Clearly outline in the lease which utilities you cover and which are the tenant's responsibility.

Legal and Regulatory Considerations

Before deciding on a utility payment model, familiarize yourself with local laws and regulations. Some jurisdictions have specific rules regarding utility billing and landlord-tenant responsibilities.

Confirm that your lease agreement complies with these regulations to avoid legal issues. Consulting with a local attorney or real estate expert can help you navigate these requirements.

Benefits of Energy-Efficient Upgrades

Investing in energy-efficient upgrades, such as LED lighting, low-flow faucets, and energy-efficient appliances, can reduce utility costs and attract environmentally conscious tenants. These upgrades can also justify higher rent rates, offsetting the initial investment over time.

Communication and Transparency

It is important to keep in clear communication with tenants, regardless of the utility payment model you choose. Provide detailed information in the lease agreement about utility responsibilities, payment procedures, and any usage limits or additional charges. Being transparent about these terms helps build trust and reduces the likelihood of disputes.