5 Reasons You Should Rethink Charging a Flat Fee Rate for Resident Utilities (And What to Consider Instead)
If you’re a multifamily property that charges residents for their share of utilities, you’re already recouping some of your expenses and are one step ahead of the game – kudos! But if you manage this process in-house, or charge residents a flat fee rate for any utilities, you might want to rethink your strategy.
What is a flat fee rate?
Flat fees are often determined based on past historical utility data, and that data is used to forecast utility charges going forward. With this approach, the property ends up either under-charging or over-charging during seasonal utility usage fluctuations.
While it might be easier to charge all residents a flat fee billing for utilities, in reality it causes many complications for your business. Usage or ratio-based billing structures offer many benefits, from increased recoupment and revenue, to reduced consumption and legal risk. Here’s why many multifamily companies are changing their utility management strategy to a usage-based model and moving away from flat fees:
Financial Risk and Cash Flow Volatility
Utility rates are fluid. Charging residents a flat fee rate leaves your cash flow volatile as rates fluctuate, and leaves money on the table as rates rise.
Regulatory and Legal Risk
As utility rates fluctuate, property managers will likely want to increase the fees they charge residents, but regulations often include stringent notification requirements, as well as parameters prohibiting over-allocation of utility expenses. Unless you have a regulatory expert on staff who can interpret new and existing laws for your property and location it’s a good idea to enlist the help of an expert.
Many properties choose to include the flat fee billing for utilities as part of rent. This can save the management staff time as there’s less administrative work required, but in a competitive rental market it puts the property at a competitive disadvantage by artificially inflating rent prices. Conversely, if a property is charging competitive rent prices that include a flat fee for utilities they are effectively charging too little by bundling those items.
Resident Confusion and Dissatisfaction
Imagine getting charged the same amount for utilities in a studio apartment as someone in a two bedroom. Doesn’t seem right, does it? Ratio and usage-based billing systems are much more fair to residents and bills are easier to explain when the question comes up.
Lack of Conservation
Charging a flat fee rate and not holding residents responsible for their usage leads to over-consumption. Consumption-based billing lets residents see how their habits directly impact their bill, leading to more careful usage and reducing your overall bill.
Using Resident Utility Billing to Recoup Utility Expenses
Now that you are aware of all the pitfalls from charging a flat fee rate for utilities, how can you go about rectifying the situation? We recommend working with a resident billing provider to restore your revenue and net operating income, save you and your staff time, and give you peace of mind that you’re not running afoul of any regulations. They will devise an apartment utility management strategy that pinpoints your best option for calculating resident charges (RUBS or submeters) and a recoupment structure that complies with your local regulatory environment. Once you are up and running, your provider will send residents a consolidated bill containing rent and utilities that they can pay in one transaction, giving you a more seamless payment process and the ability to recoup all of your utility expenses.
If you’re curious about what to look for when selecting a resident billing partner, our recent blog post can give you some helpful pointers. As always, we’d be happy to talk with you in person about your unique situation.