PayLease Property Talk: To Bill or Not To Bill
Resident Billing is a growing trend in the property management industry, especially in the multifamily space. Property Management companies are implementing comprehensive resident utility billing programs to take control of their expenses and encourage conservation by recovering utility costs from residents. However, some companies have been hesitant to implement a utility billing program because they think they already have a solution. Some charge their residents a flat fee for utilities; others include utility costs in the rent. Some companies want to recoup utility expenses, but don’t have the time or resources to decipher confusing resident billing regulations. Others just have no idea where to start.
If you fall into any of these categories, find out what Resident Billing actually is, and why it’s taken the property management industry by storm.
To Bill or Not To Bill
First things first, let’s break down what Resident Utility Billing is. In short, it’s taking any master metered utility bill such as water, sewer or gas and dividing it up among the people who are using it: your residents.
Why Should You Bill?
First and foremost, you increase revenue & property value. Decoupling utilities from rent allows you to create an additional line item on your resident ledger, which creates a new revenue stream for your property. This added revenue increases NOI, and after factoring in cap rates, we typically see a dramatic spike in property value.
Second, you should bill to stabilize utility expenses. With utilities now under control, property managers avoid dramatic rent hikes to accommodate for rising utility costs. Managing utility costs, which according to ENGIE Insight are the third-largest budget item for property management companies, is a major operational challenge. Utility costs are often rising, but they can also be volatile because of market and environmental factors. As a result, if property managers are not charging to recover these expenses, it makes their budget difficult to manage thanks to unpredictable utility costs.
The third and albeit most altruistic reason you should bill for utilities, is conservation. Billing back based on consumption provides residents with a fluctuating monthly utility charge, which incentivizes residents to practice conservation.
According to Fannie Mae’s Multifamily Energy & Water Market Research Survey, “when apartment owners paid for all energy costs, median annual energy use was 26% higher than when tenants were held accountable for their usage.”
You’ll notice residents will be more mindful of reporting leaky toilets, taking shorter showers, or even shutting down that under-the-table pet washing service they were running from their bathroom. OK, that last example may be a stretch, but you get the idea. A lower monthly utility bill fosters a property-wide “go green” initiative that you can market to future tenants.
What’s the Catch?
With all those benefits, why don’t all property managers bill for utilities? Great question. Usually it comes down to one of three things:
The first is that they think they have it covered: By including utilities in the rent, many property managers think their financials are covered on an annual basis. But if you and your competitor across the street are charging the same amount in rent, except they’re billing their residents back for utilities and you aren’t, their NOI is much higher than yours and you’re leaving money on the table.
The national average according to Zillow is $200 spent on utilities per unit per month. That’s $2,400 per unit per year! How many units do you have? Go ahead and do the math for your property…
$2,400 x # of units at your property = your potential annual recovery (pending regulations).
You get the idea, moving on.
The second reason property managers don’t bill back is fear. Some property managers don’t want to be the first in their neighborhood to make the switch, but a study by The Martec Group found that 37% of multifamily firms are billing back for at least one utility. And that number was up 5% from the previous year, showing that it’s a growing trend. Drought-sensitive California recently passed a law requiring water meters to be installed at individual apartments starting with new developments in 2018. And other states will likely follow suit. So if no one in your neighborhood is doing it now, just know that they will soon. Don’t just keep up with the Joneses, BE the Joneses!
Another fear some might have is whether these initiatives align with their specific county’s regulations on billing back. Is it even legal in your county? This is a valid concern! It’s important to be cautious and make good decisions for your property. That’s why it’s so important to find a billing partner with a compliance team whose sole responsibility is to keep up with all of the numerous state and municipal regulations, and will inform you right away if new laws will affect your properties.
The third reason property managers don’t bill back, and the one we hear most often is confusion. A lot of folks just don’t know how it works, or how to get started.
There are a lot of different methods and considerations when it comes to recouping utility costs, so we suggest partnering with a provider that can help guide your strategy. In our next video we’ll dive into the various recoupment strategies out there, and show you how to get started.
Watch the next video in the PayLease Property Talk series: Choosing the Right Provider
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Podcast: Starting a Utility Billing Program