As of January 2020, the California Rent Control Law prohibits landlords from raising rents beyond a fixed cap of 5%. As a property investor, this means it is crucial for you to analyze how you manage your expenses.
Sometimes absorbing an expense is just one of the costs you have to account for in order to do business. Take utilities for example. Whether it’s water, sewer/wastewater or trash, electricity, gas, or pest control, absorbing the costs is just something you do. Right?
Wrong
A Ratio Utility Billing System (RUBS) prevents you, the owner, from absorbing the costs of utilities. This system enables property owners to pass along utility costs to the people who actually use those services—the residents. Not only is RUBS a great way to manage costs, but it also supports the California Energy Commission’s Energy Efficiency program by helping residents become more mindful of their utility usage, and therefore, be less wasteful.
What is RUBS?
Simply put, RUBS divides utility bills among residents of a property based on predetermined criteria. It’s a viable option when submetering is either too expensive or too cumbersome to install. According to “Commercial Property Executive,” submeters typically cost $1,500 to $2,000 per apartment, including installation. In many situations, submetering isn’t a practical solution, which makes RUBS a sensible option.
How is RUBS Calculated?
RUBS calculates the utility consumption of a unit based on occupancy and usage. Typically the property management firm works with a third-party provider like Yardi, Community Utility Billing Services, Northwestern Utility Billing Services to conduct research on their client’s behalf and determine a fair and legally compliant RUBS formula.
Water and Sewer
Most RUBS formulas base water and sewer allocations on the number of occupants per unit. It’s reasonable to assume that two people will use more water than one, or a single person occupying a one-bedroom unit will use less water than two people living in a one-bedroom unit. But some formulas account for variables such as the number of water fixtures in a unit or if a baby is added to the unit, their share of the bill doesn’t necessarily increase. After all, an infant doesn’t use nearly the same amount of water as an older child or adult. That’s why it is necessary for the RUBS service provider, with assistance from the property management company, to keep track of resident data to ensure that the formula remains accurate—and fair.
Gas & Electricity
When individual units don’t have gas or electric meters, a common approach is to calculate costs based on the unit’s square footage. The logic is sound—the larger the apartment, the more gas or electricity required to heat or cool the space.
Before committing to this formula, you should take into consideration each unit’s design. An apartment might be larger, but that does not mean it has more appliances or occupants than smaller units. In other words, RUBS formulas are not one size fits all and you must consider specific variables for each property.
Common Areas
Most Ratio Utility Billing formulas also account for multifamily utility areas available to all residents such as green space, pest control, workout areas, or a clubhouse. Typically, the formula features a 20/80 split in which the owner pays 20% of the bill for common area utility costs. While no formula is perfectly fair, allocating 20% of the cost to the property owner is a reasonable compromise.
Skin in the Game
When utility costs are billed directly to residents, they are more likely to better manage their utility consumption. Part of this is human nature. If residents don’t see a utility bill, reducing utility usage isn’t top-of-mind. However, after reviewing utility costs on their monthly rent statement, their behavior changes, and consumption decreases. Recently, a study conducted by the National Multi-Housing Council and the National Apartment Association found that properties that use a RUBS allocation formula to distribute water costs had a reduction of 6 to 27% in water usage. Clearly, residents got the message!
Overall, using RUBS offers multiple advantages including:
- Quick implementation
- Returns on utility expenses
- Increase in cash flow
- Encouragement to conserve utilities
How to Introduce RUBS Billing to Residents
Passing utility costs to residents can be tricky because nobody likes to see an increase in their housing expenses. However, if communication is clear and timely, residents tend to understand and accept the change. An effective approach is to post a 30-day notice to change the billing method for utilities. Also, follow up with phone calls to each resident 15 days before implementing RUBS to explain the new policy, the rationale behind it, and how utility costs will be allocated.
In most cases informed residents rarely object, particularly when they receive communications that explain that they and their fellow residents have an opportunity to reduce utilities through more conscientious use of these commodities. It’s difficult to argue with the premise that the person using the utilities should pay for a portion of the costs. Properties should also make it easy for residents to report neighbors who blatantly overuse utilities to help correct the behavior and lower costs for everyone.
A Ratio Utility Billing System is an effective way for property investors to recoup costs and proportionately share responsibility for conservation with residents in a fair and reasonable manner. Beyond the financial benefits, quite simply, it is the right thing to do, as it is in our collective interest to conserve the Earth’s natural resources.