There are many ways to make money in real estate and the best real estate investments utilize ratio utility billing systems (RUBS) for financial growth. Last week I discussed how to force appreciation through rent growth. This post will focus on how to increase appreciation by lowering utility expenses.
The four common utilities associated with multifamily real estate are:
- Electric
- Water / Sewer
- Trash
- Gas
Buildings differ in how they are constructed. Many are master metered, meaning they have a single meter to measure the electric, a single meter to measure the water, and a single meter to measure the gas for the entire complex. Consequently, the owner historically pays the utility bills.
In this situation, tenants tend to think less about conservation – leaks get reported less often, people take longer showers, air conditioners get left on while the tenant is at work, and various other wasteful practices. Without skin in the game, I think it is human nature to over-consume. Studies have shown that energy usage is as high as 40% more in “utilities included” apartments versus apartments in which the tenant pays their own utilities.
To combat rising utility costs, many owners have installed low-flow toilets and shower heads, energy star appliances, and CFL light bulbs. While these are good practices, the best solution is to have the tenants pay their own utilities via sub-metering or ratio utility billing systems (RUBS). Sub-metering is nice in that it allows the owner to directly monitor each tenant’s usage and bill accordingly. However, retrofitting an existing building with sub-meters can be costly and impractical.
The alternative to this is ratio utility billing systems (RUBS). RUBS requires no physical construction and has no associated startup costs. It is a system through which the owner can bill back the tenants for their utility usage based on formulas that take into account the unit size and number of occupants. It may be wise to utilize a third-party company that specializes in RUBS to make sure you stay compliant with state and local regulations. In general, the utility bill will have a 10% – 20% common area deduction that the owner is responsible for and the rest of the utility bill will now be paid for by the tenants. Through RUBS, the owner can take a hefty expense and turn it into an income stream.
RUBS promotes tenant conservation as well as consistent cash-flow and appreciation for the property owner. Take for example, a 200 unit property in which RUBS was just implemented. In this hypothetical scenario, the tenants now pay on average $7 a month for trash, $13 a month for water, and $20 a month for electricity.
This $40 a month decrease in your utility bill multiplied by 200 units creates an $8000 a month savings. That $8000 a month equals $96,000 a year in new cash-flow which accounts for just over $1.3 million in forced appreciation. RUBS is just one of many ways that an experienced real estate investment firm can create forced appreciation, long-term wealth, and financial freedom for their investors. To learn more about this, schedule a 15 minute introductory phone consultation.
P.S.The best real estate investments are commercial multifamily because they utilize multiple levers like RUBS to make money in real estate and create financial growth.
Want to learn more?
Download your free copy of Evidence Based Investing and learn why it’s a preferred asset class.
Great article Dennis. This may RUB tenant the wrong way…how do they benefit?
MW Fitzgibbons
Hello Michael,
Thanks for the great question. Most quality markets will already have some penetration of RUBS. In this case, good communication with your residents is important. A month or two before their contract expires; a letter should go out explaining that the property is being switched to resident paid utilities. This letter should express appreciation for the resident as well as why they should stay for another year.
Make sure you have done a good rent survey of your competition and know how the market is moving. If your market is hot with high occupancies, you may feel comfortable raising rent and instituting RUBS at the same time. Even if the resident leaves, it will be easy to find a new renter under these conditions. In slower markets, you may have to forego a rent raise that year if you are instituting RUBS.
In markets with little penetration of RUBS, some owners will actually decrease rent when they trial RUBS in order to achieve easier renter retention and acceptance of renter paid utilities. In these cases, the owner figures out how much each renter costs him or her a month in utilities. Let?s say it is $35. Then they offer a $25 a month rent decrease. This allows them to continue to increase NOI while making RUBS more palatable to the renter.
The key to this is good communication along with a compelling reason to continue living in your community.