Wednesday, 30 May 2012

Landlord paying Utilities!

I have just been reading a forum post about a concept derived by this person in USA. The concept itself is relatively simple, basically charge a slightly higher rent to the tenant, and in return, you will pay all of the tenant's utility bills, i.e water, electricity and gas. 

At first I was a bit skeptical of the concept, because you have no control what the tenant does with their house, so you are taking an expense out of your hands. But reading the description of how it all works, to be honest it sounds like a really great idea, a definite win win for everyone. Below is a bit of a summary of how it all works:

  • The property is first to be fitted out with high energy saving light globes, with timers attached to ensure vacant rooms are not left bathed in light
  • High efficient whitegoods are installed to ensure electricity is not wasted when using a dishwasher, fridge, dryer etc
  • A thermostat is fixed at a certain temperature, say 23 degrees celcius, all year round. The important feature is that this temperature is fixed. Heating and cooling can be a high expense, and you would not want a tenant to set a temperature up to 30 degrees in the middle of winter and waste all of the electricity that you are using.

By completing all of the above, you would hopefully be able to reduce the typical outgoings of utilities by around 20%. So already there is a benefit to the environment which is always a positive thing. 

Now see below for a working example of this situation, keep in mind these numbers are not based on any real scenario.

Initial utility expenses:

 Gas -          $200 per quarter
 Electricity - $300 per quarter
 Water -      $150 per quarter

With the reductions above, the  renovated utility expenses are:

Gas -          $150 per quarter
Electricity - $250 per quarter
Water -      $150 per quarter

The initial rent for the property was $400 per week, but now with all utilities paid for, this number becomes $450 per week (I believe $50 a week is reasonable given all utilities are paid for)

Rent collected initially would be $400 x 52 = $20,800 annually

Rent collected after renovations would be $450 x 52 = $23,400 annually
However there is the $2,200 to be paid in utilities annually
So the net received becomes $23,400 - $2,200 = $21,200 annually (greater than the initial $20,800)

Looking at it from the tenants point of view now

Rent paid initially would be $20,800 (as before) with the addition of utilities of $2,600 utilities
Total paid by tenant to be - $20,800 + $2,600 = $23,400

With landlord paying utilities the total paid by tenant is $23,400 (same as before)

So as you can see, the tenant does not lose out, and the landlord is a couple hundred ahead. But not only is there the financial advantage. There is also the potential dilemma of services being shut off due to bills not being paid, and then the connection fee providing an added expense for the landlord if the tenant is moved on. Also this will provide you with more tax deductions when performing your tax return, the cash paid on the utilities would be tax deductible! Although this may be countered by the increase in income which will have to be declared, however you still not be in a worse position than before so it is definitely a good move.

So I must state that I have not tried this myself, and the numbers above are purely an example, however I believe the practice should work well in theory, and is another way to get a bit creative with your investing to increase the cash in your pocket. One thing that needs to be looked into is the cost of renovating the property to suit the changes listed above, I feel this may run into the thousands, so it may take a couple years before you fully realise the profit from this change.

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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