Charging tenants for utilities is one of those areas in real estate where small decisions can have a big impact. When it’s done correctly, utility reimbursements can add meaningful value to a building. When it’s done poorly, it can create legal and operational problems that are hard to unwind later.
There are two primary ways investors typically handle this. You can separately meter utilities, or you can implement a RUBS program, which stands for Ratio Utility Billing System. Both approaches can work well, but each comes with different costs, considerations, and risks.
Separately Metered Utilities
Separately metering utilities is the most straightforward option conceptually. Each tenant pays directly for their own usage, and the owner no longer carries that expense.
The challenge is the upfront cost. Installing separate meters, especially in older buildings, can be expensive. It’s not unusual for a project like this to cost a substantial amount of money. That often leads owners to ask whether it’s really worth the investment.
For example, if it costs $100,000 to install separate meters and doing so saves $10,000 per year in utility expenses, it will take ten years just to recover that cost through cash flow. If you don’t plan to own the building for that long, it can feel like a bad deal.
But that analysis misses an important point. Utility savings don’t just affect cash flow. They also affect value.
If that $10,000 in annual savings is capitalized at a 6.5 cap rate, it adds roughly $153,000 in value to the property. That means even if you don’t own the building for ten years, you still benefit from the increased value at the time of sale. In many cases, that makes the investment worthwhile.
Not all utilities are equally difficult to meter. Electric and gas are typically the easiest to separate and are often already individually metered in many buildings.
Water is usually the most challenging. However, newer smart meter technology has made this much simpler than it used to be. Smart meters can feed usage data directly into a system that allows you to bill tenants accurately without a lot of manual work. What once felt complicated is often far more manageable than owners expect.
RUBS Programs
The second option when charging tenants for utilities is a RUBS program, or Ratio Utility Billing System. Instead of physically separating utilities, you divide the utility costs on paper.
With a RUBS program, the total utility bill is allocated among tenants based on a formula. That formula might consider factors like unit size, number of occupants, or a combination of both. The key is that tenants reimburse the owner for their portion of the utility costs rather than the owner paying the full bill.
This approach avoids the large upfront expense of installing separate meters. However, it introduces another type of risk if it is not implemented correctly.
If you are going to use a RUBS program, documentation is critical. The goal is to make sure you are not classified as a utility provider.
If a landlord is treated as a utility provider and is not following the regulations that apply to utility companies, that can lead to serious problems. That’s why it’s essential to follow a properly structured RUBS program with clear documentation that explains how charges are calculated.
Tenants should be able to see exactly how their reimbursement is determined. This transparency helps protect you as the owner and reduces the likelihood of disputes.
Spending money on a quality RUBS program is not an area to cut corners. Doing it right protects you legally and ensures the reimbursements hold up over time.
Long-Term Value
Whether you choose separate metering or a RUBS program, the common thread is value creation. Charging tenants for utilities reduces operating expenses, which increases net operating income. That increase in NOI directly translates into higher property value.
This benefit shows up both during your ownership and when you eventually sell the building. Buyers recognize utility reimbursements as a real income component, and they underwrite them accordingly.
Final Thoughts
Charging tenants for utilities is one of those details that can quietly make a big difference in a building’s performance. Separately metered utilities and RUBS programs both have their place, as long as they are implemented correctly and with a clear understanding of the costs and risks.
Many investors we work with appreciate having our guidance on how to add value without creating more headaches. If you’re evaluating options for a multifamily property in Pennsylvania or Maryland, contact us to talk through what approach makes the most sense for your situation.
