Do you include utilities in your rent? Whether you do or you don’t, the million dollar question is why? Why not include it?
The answer is rent growth. To elaborate, operators are realizing that with rapid rent growth comes a growth in supply. However, coupled with stagnant wage growth, there is a hesitancy these days as operators are starting to wonder if the good times are coming to an end. If they are, how do you as an operator grow your property’s NOI if raising the price of rent is no longer an option?
Sadly, rent growth is no longer moving up and to the right. Over the entire country we are now starting to see rent growth decrease. Hopefully this is not a trend that continues, but it is scary to compare the supply hitting the market with the fact that wage growth has not increased in quite a while. We all know that you typically look for three times the amount of monthly rent in an applicant’s income. Therefore if incomes don’t rise, and supply continues to grow, it will be tough to continue lean on rent revenue to increase NOI.
Don’t fret! There is another way to recoup costs that is currently being overlooked by management companies all over the country. Why not turn your focus on expense management? Think of it this way, when early engineers built the Transcontinental Railroad or dug the tunnel for the English Channel, they didn’t start from one point without considering the other end. They worked from both sides and met in the middle.
In the past decade we’ve seen a huge focus on the revenue side of property management, particularly when you consider revenue management systems like The Rainmaker Group or YieldStar. Obviously, the revenue side of the house is the primary concern, but the expense side is curiously out of focus. It’s not that operators don’t recognize the importance of expense management, it’s just that the revenue side is more… sexy. The expense side is like Marla Hooch from A League of Their Own. She’s overlooked because she’s not pretty, which (in this case) makes PayLease Geena Davis. We are calling Marla (expense management) out and saying ‘hey, this girl can actually play ball!’
In other words, let’s focus on expense and revenue if we’re trying to drive NOI.
Can you relate to this next scenario? You’re traveling for work, and the first thing you do once you enter your hotel room is crank the AC because (guess what?) you’re not paying the electric bill. While you’re at it, you go ahead and take a nice long shower because you’re not paying for the water bill either. Which brings us to an important question – why do properties include utilities in the price of rent?
One reason, some might say, is the cost of water. Why not include it? After all, water is not that expensive compared to gas and electricity, except that in recent years the cost of water has been drastically rising. This may be obvious in states like California where we experienced that biblical drought that had us swapping our green grassy lawns for desert rocks and cacti.
What’s surprising though, is that we’re also seeing a 130% increase in the cost of water over the past four years in states like Georgia where there’s no hint of a drought.
Moral of the story is, even if your property is in a state with an abundance of readily available cheap water, if you’re including it in your rent, then we can guarantee your residents are using more than they should. Hello! That means it’s affecting your bottom line.
Including utilities in the rent is like giving your residents access to an all-you-can-eat buffet. It is wise to consider switching to a consumption-based billing method instead. You might be thinking, ‘but residents prefer the all-you-can-eat method, I’ll lose them if I switch.’ For many years this was true, but recently consumers’ mindsets have started to shift. Every year, more and more organizations are adopting these sustainable strategies not only to reduce expenses, but because consumers are aligning themselves with products and services that have adopted such initiatives.
Just look at the following stats from SolarCity:
- 72% consumers want to learn more about corporate sustainability initiatives
- 75% of consumers would be more likely to buy a product or service if the company is making an effort to be sustainable
- 82% of consumers are more likely to purchase a product that represents Corporate Social Responsibility than one that does not
- 93% of Americans have done something to conserve energy in the past two years
What does all this mean? It means sustainability is the tie-breaker. They won’t choose your property because you’re conserving, but if a potential tenant is debating between two properties that are very similar except for the fact that one is ‘green’ and the other is not, conservation will win the battle.
From an NOI standpoint, it makes more sense to separate the utilities so that you can use more of your rent revenue towards the bottom line of your property as opposed to paying off high utility bills.
Let’s say property ‘A’ includes water in the rent price, and the residents of this property have a leaky faucet, or their toilet is running. They decide not to report it because, why would they? They’re not paying for the wasted water, they don’t want the maintenance guy coming into their apartment, and they don’t own this property, so they just don’t care. Because of that, property ‘A’ is giving (on average) an extra $100 a month from their rent revenue to the water company. To make up for some of the cost, property ‘A’ decides to increase the rent by $50.
Property ‘B’ installs sub-meters and decides to charge each unit for their individual usage. So instead of increasing the rent, they keep the rent price as is and charge the resident back for the utilities they actually use. Because the residents in property ‘B’ are now conscious of this, they start using less water, gas, and electricity and pay around $50 a month out of their own pocket for their personal utility bills.
Because of the $50 rent increase at property ‘A’ and the $50 utility charges at property ‘B,’ the total out-of-pocket expense for both residents is about the same. However, the owner of property ‘A’ is still handing money over to the water company every month, while the manager at property ‘B’ is using those recouped costs to increase their NOI.
When you take the utilities out of the rent and don’t increase the rent price, three things happen. One, the resident will use less electricity, less gas, and less water, saving the planet little by little. Two, the resident will be happy their rent was not raised, and will consider this when the time comes to renew their lease again. Make your property sticky, people! Three, you are no longer paying the utility bills, which will result in a higher NOI for your property. It’s a win-win-win!
Hopefully now you are at least entertaining the idea of billing back your utilities to your residents, and if that’s the case, then the next question is, ‘how do I get started?’
Click here to learn the two different ways you can bill back utilities to your residents, and find out which is right for your property.