Multifamily Utility Considerations for Investors

What Apartment Investors Should Know About Utilities

Utilities; they may not be the sexiest part of your multifamily investing strategy-- but if you’re not thinking about them at all, you could be losing out on serious cash. That’s especially the case if you currently own an older property without submetering and/or if you currently include utilities in the price of your tenants’ rent. In this article, we’ll review the benefits of two of the major utility billing methods; submetering and Ratio Utility Billing Systems (RUBS). We’ll also mention other ways for multifamily investors to save money on utilities, including utility benchmarking, convergent billing and vacant cost recovery. 

Submetering: Expensive But Highly Effective 

If your apartment building is currently not submetered, you may want to consider installing a submetering system for major utilities, such as gas, water, and electricity. Submetering tracks the individual usage of each unit, and therefore, is the best way to accurately charge residents for the exact amount of utilities they’re using. In addition, since submetering holds each resident accountable for their individual utility use, it’s an ideal way to reduce overall water and energy use. While new technologies have driven down the cost of submetering, it can still be an expensive process, and therefore, it isn’t right for everyone. To determine the price point for submeter installation in your area, you should contact a few local submeter installation firms for quotes. 

Ratio Utility Billing System (RUBS): A Cost-Effective Solution 

If submetering is simply beyond your budget, utilizing a Ratio Utility Billing System (RUBS) could be the perfect solution. Unlike submetering, RUBS generally does not require any kind of physical changes or the installation of any equipment. Instead, RUBS uses standardized formulas to allocate each unit a reasonable fraction of the building’s overall utility expenses, based on factors such as the size of the unit, the number of bathrooms, and the number of residents. Utilities that can be charged to residents via RUBS include electricity, gas, water, sewer, and trash. In many scenarios, RUBS can be initiated at zero cost to the apartment building owner and can be charged to residents as a small fee along with their overall monthly utility bill. 

According to some sources, RUBS results in a 5%-40% reduction in overall utility use; plus, RUBS has been recommended by both the National Apartment Association (NAA) and the EPA as an excellent way for apartment owners to incentivize their residents to conserve water and reduce electricity use.

Utility Benchmarking: Knowledge is Power 

In the process of utility benchmarking, a firm will analyze and track an apartment’s utility use over a specified period of time. The resulting data can be utilized to compare the building to similar properties and discover ways to reduce the property’s utility use. Utility benchmarking also has a variety of ancillary benefits, including helping property owners discover billing errors, locate broken equipment, and qualify for green financing programs, such as the Freddie Mac Green Advantage or Fannie Mae Green Financing programs. 

While utility benchmarking is optional in most parts of the U.S., it is now mandatory for some buildings in California, in particular, buildings larger than 50,000 sq. ft., or those with eighteen or more unit meters. HUD has also proposed requiring multifamily borrowers to engage in utility benchmarking, though these rules have not yet been enacted. 

Convergent Billing: An Effective Payment Compliance Method 

In many apartment properties, especially older ones, residents may often be faced with multiple, separate bills per month, including bills for rent, water, power, trash, garage fees, pet fees, sewage, and other expenses. This can be confusing and can lead to residents forgetting to pay some of their bills. In the process of convergent billing, all a resident’s bills (including rent and all utilities) are placed on one statement, which makes it much more likely that residents will pay all of their utilities on time. 

Vacant Cost Recovery: A Way to Recover Unpaid Utilities 

While it may be hard to believe, on average, 3-5% of all apartment residents aren’t actually paying their utility bills, typically due to paperwork errors that leave the apartment building responsible for paying the unit’s utility costs (i.e. the utilities are not yet in the resident’s name). In the process of Vacant Cost Recovery (VCR), sometimes referred to as Vacant Unit Cost Recovery (VUCR), a firm will analyze a building’s utility use and billing history in order to charge residents for their previously unpaid utility usage. For larger buildings, especially those with less than ideal billing systems, this could lead to the recovery of thousands of dollars in utility expenses.