There are many important decisions to make as a landlord and balancing outgoing and incoming expenses is paramount.
Landlords want to maximise cash flow and boost the return from their investment property. When considering how best to do this, questions surrounding whether to include utilities for a rental property often arise.
We take a look at the advantages and disadvantages of including the cost of utilities.
Advantages of including utilities in a rental property
One of the main advantages of including utilities for a rental property is that bills don’t need to be double handled. Rather than receiving a bill, sending it to the tenant and collecting the sum in time for payment, the landlord can simply include it in the cost.
This gives the landlord the potential to charge a slightly higher rental price. Plenty of prospective tenants will love the idea of having utilities included with the rent as it reduces stress and effort on their part.
For electricity and gas, if a premise is not separately metered the landlord is required to include utilities for the rental property. A premise is considered separately metered if the usage by the tenant is measured distinctly from the usage of the landlord. While this is a requirement under most tenant agreements, it can prove to be beneficial for the landlord. Including utilities will save the landlord time and effort in calculating the percentage of energy used by the tenant.
Utilities paid by the landlord are also tax deductible. The Australian Taxation Office governs legislation that allows landlords to claim an immediate deduction for costs like electricity and gas in the year the expense was incurred.
If the tenant covers the cost of electricity and gas, the landlord cannot claim this.
Disadvantages of including utilities for rental property
Including utilities can be beneficial but there are certain drawbacks. The landlord will have higher financial responsibilities and even heightened liability.
There is also the risk of tenants having an ‘all-you-can-eat’ attitude. That is, when tenants don’t have to pay for consumption they often consume more. The landlord may end up paying a hefty amount on top of their existing expenses if this is the case.
If electricity or gas rates go up, this will also increase the utility bills. Even if a landlord has previous billing information to base their pricing on, utilities can be unpredictable. Price fluctuation and market conditions can both affect the price you pay each month.
If a tenant is paying for utilities, will the payments be fixed or variable? It’s important for landlords to consider this before leasing the property. A fixed rate is typically more convenient for both parties and can even strengthen the landlord-tenant relationship. On the other hand, a variable rate is harder to manage but is more reflective of the actual costs being paid.
Landlords should also think about the structure of utility payments. Will the tenant pay for utilities and rent as two separate expenses or as one total cost? Will there be an additional fee if utility payments are late?
It’s important to remember there is no right or wrong way when it comes to utilities for a rental property. There are several advantages and disadvantages for each investor scenario. Careful planning and proper consideration of your financial situation will help you make the best decision for your investment property.