Why A Ratio Utility Billing System (RUBS) Is A Property Owner’s Formula For Success
Whether you’re a seasoned property investor or just starting out, how you manage expenses significantly impacts the return on your investment. Sometimes absorbing an expense is simply the cost of doing 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?
Not when there is a Ratio Utility Billing System. Also known as RUBS, 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 system for managing costs, it supports the California Energy Commission’s Energy Efficiency program by helping residents become more mindful of utility usage, and therefore, less wasteful.
What is RUBS?
RUBS is a system that divides utility bills among residents of an income property based on pre-determined criteria.
It’s a viable option when submetering is either too expensive or too cumbersome to install. Adding a submetering system is an acceptable way to measure tenant utility usage. However, it’s an expensive endeavor regardless of whether costs are passed through to residents or absorbed by the property owner. For example, 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 an effective option.
The value of RUBS is that it decreases property owner expense. It also motivating the majority of residents to do the right thing—conserve water and energy. Given California’s ever-increasing population and the corresponding depletion of resources, conservation has never been more important.
Skin in the Game
When utility costs are billed directly to them, residents are more likely to manage utility consumption better. Part of it is human nature. If residents don’t see a utility bill, conservation isn’t top-of-mind. However, after reviewing those line items on their monthly rent statement, the paradigm changes, and consumption decreases. The good news is that the resident’s monthly bill does not increase significantly, but utility usage noticeably decreases. Recently, the National Multi-Housing Council and the National Apartment Association conducted a study which found that properties that use a RUBS allocation formula to distribute water costs had a reduction of 6 to 27 percent in water usage. Clearly, residents got the message!
How is RUBS Calculated?
Several factors influence a RUBS formula. What are California state regulations? How about specific municipal requirements? Does the local utility provider have restrictions? If a property qualifies for RUBS, what are best practices for determining the formula? These questions require more due diligence, but typically the property management firm will work with a third-party provider like Yardi, Community Utility Billing Services, Northwestern Utility Billing Services or others to conduct the research on their client’s behalf and determine a fair and legally compliant RUBS formula.
Since not all utilities are created or used equally, the type of utility factors into the property-specific 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 will use less water than two people living in a one bedroom. But some formulas account for variables such as the number of water fixtures or if the addition of a person into the unit is a baby, 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 incumbent upon 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 greater the consumption 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 each property must consider their specific variables.
Most RUBS formulas account for common areas available to all residents such as green space, pest control, workout areas, clubhouse, etc. Typically, the formula features a 20/80 split in which the owner pays 20 percent of the bill for common area utility costs. While no formula is perfectly fair, allocating 20 percent to the property owner is a reasonable compromise.
How to Introduce RUBS to Residents
Passing through utility costs to residents can be tricky because nobody likes to see an increase in their housing expense. 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 rental agreement form. Also, follow up with phone calls to each resident 15 days before implementation 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.
RUBS is an effective way for property investors to recoup costs and proportionately share responsibility for conservation with residents in a fair and reasonable manner. But beyond the financial benefits, quite simply, it is the right thing to do. As Californians, it’s in our best interest to embrace conservation. If a financial incentive is what it takes, then RUBS can be quite an effective motivational tool.