Implementing a Ratio Utility Billing System (RUBS) to Increase Profits
If you’re a multifamily investor, utilities can be seriously expensive and can easily eat into your profits. While many landlords charge an additional set monthly bill for utilities, the true cost of utilities can often exceed the monthly payments made by residents.
This is especially the case in older properties that do not have individual metering for each unit. Many property owners decide to install submeters in the properties, but this can get quite expensive.
One effective solution for you to reduce utility costs is to implement RUBS (Ratio Utility Billing System).
RUBS is a different way to calculate monthly utility bills, which looks at factors like the size of a unit or its number of bathrooms to calculate its portion of a building’s overall monthly utility bill. However, tenants will have to agree to RUBS before its implementation, and RUBS is not legal in all cities or states.
How to Calculate RUBS
RUBS uses various factors to calculate a unit’s monthly utility bill, including:
Square footage
Fireplace(s)
Number of unit residents
Number of bathrooms, toilets, and showers
If a unit has a washer, drier, or washing machine
RUBS can cover a wide variety of utilities, including:
Water
Electricity
Sewer
Gas
Trash removal
You can calculate RUBS in a variety of ways by using the factors above. For example, if a property had 10 identical units and the water bill was $400 for a particular month, each tenant would be charged $40 for water use costs.
Alternatively, RUBS can be calculated by square footage, particularly property has units of various sizes. For instance, if the combined gross living area of an apartment building was 10,000 square feet, and the electricity bill was $1400 for a particular month, residents would be charged $0.14 per square foot (PFS). That would
Why Use RUBS over Submetering?
If your apartment property does not have individual meters, you may be tempted to begin installing them. However, submeter installation generally costs between $550 and $900, an expense you might want to avoid paying.
For a twenty-unit apartment complex, that would bring the total price of submeter installation to between $11,000 and $18,000.
Implementing a RUBS system costs nearly nothing and can significantly decrease owner utility costs, increasing an investor’s profitability and ROI. That, of course, positively increases cash-on-cash return and overall project IRR. In many cases, RUBS implementation decreases owner utility costs by 20%.
What are the Pros and Cons of RUBS?
Before you decide to implement RUBS in your apartment building, you should look at the various pros and cons of the RUBS process.
Pros of RUBS:
Some of the benefits of RUBS include:
RUBS can save you money: As we mentioned earlier, by decreasing costs and increasing NOI, RUBS can increase a property’s cap rate and hence, its market value, which can be ideal if you’re is looking to sell or refinance your multifamily property in the near future.
Saving your tenants money: If your tenants pay a flat utility fee, or utilities are covered in their rent, they will often be laxer with their utility use. For instance, they may set the air conditioner on high all day during the summer, or leave the heat on all day during the winter, even when they’re not home.
Thinking utilities are free, they may also take long hot showers, or leave the lights or TV on 24/7. In many cases, this requires a landlord to raise rents unnecessarily, which may be prevented with proper RUBS implementation. In general, RUBS may make tenants more conservation-oriented, which is better for the environment and better for you as a landlord.
RUBS is fairer: RUBS may not be as accurate as submetering, but it can often be more accurate than charging each tenant the same amount, or worse, increasing rents.
Cons of RUBS:
While it does have many pros, RUBS implementation also has some cons, including:
Tenants must agree to RUBS: RUBS pushes the costs of utilities away from the landlord and towards the tenants, and, as we mentioned earlier, your current and new tenants will have to agree to the implementation of RUBS on your property.
This will typically come in the form of a lease addendum for current tenants and will be written into the general lease for new tenants. Initially, if current tenants do not agree to RUBS, you may have some units that utilize RUBS while others do not. Even if this occurs, it will still lead to partial savings.
Tenants may be turned-off: Some tenants may place a lot of importance on having their own utility meter or even may want utilities to be included in rent. If a potential tenant finds out that they will need to pay utilities via a RUBS system, they may choose to look elsewhere for a place to live. In addition, Some tenants may even decide not to renew their leases if they feel that RUBS implementation is unfair
Careless tenants: If one tenant uses excessive utilities, it could unfairly raise prices for everyone, which could lead to serious complaints from other tenants. In addition, a tenant could refuse to pay their utilities.
While this is also a potential issue for submetered or flat fee utility billing, RUBS may make it more likely for one or more of your tenants to become deadbeats, which means that you, as the landlord, will either have to evict them or raise their rents to compensate yourself for the additional cost.
RUBS may not be permitted: You will have to make sure that implementing RUBS is legal in the area where your apartment building is located. States, local governments, and utilities themselves each have different requirements, so it’s essential to check these first before trying to implement RUBS.
If RUBS is legal in your area, there may be some specific restrictions on the amount you can charge tenants, so it’s also important to take these into account. Remember, utilities are regulated at multiple levels; the state level, the utility level, and sometimes the local level, so the first thing we do is check the regulations at the property address.
RUBS programs are allowed in most states, possibly with some restrictions. Your local apartment owner’s association or public utility commission will probably be able to answer most of your questions.
How to Implement RUBS
In order to personally implement RUBS in your apartment building, you will need to:
Analyze the property: Fully conduct a property analysis, including the current costs for all utilities including water, sewer, gas, and trash removal, as well as the number and type of each unit, including information such as the number of bedrooms and bathrooms.
Implement lease changes: Lease addendums must be issued to current residents, including the exact method in which they will be charged, and how they will be required to pay.
Utilize new software: You will need to choose a RUBS utility billing software provider (there are many options), and enter all the new information into the system. This will help you track bills and payments.
Issue utility bills: You will next need to actually issue individual utility bills to your tenants. As we mention later, this, as well as the other action items on this list may actually be done by your utility company or a property manager.
Ensure payment and reimbursement: RUBS usually involves tenants directly paying the utility company, which will reimburse either the property owner or the property management company for utility costs.
Using a RUBS Consultant, Utility Company, or Property Management Company
If you want to implement RUBS, you will generally want to use a third-party consultant to determine the exact amounts you will be charging residents. This may cost between a few hundred and a few thousand dollars, but can be a great long-term investment in your property.
You can do this yourself, but it may be more of a headache than it’s worth. In some cases, your utility company may actually offer to implement RUBS for you, for a fee. Alternatively, if your building is already managed by an experienced property manager, they may be willing and able to implement a RUBS system for the property.
A third-party RUBS consultant will help you:
Analyze each unit of the property using the factors discussed earlier in the article, i.e. square footage, number of residents, etc.
Calculate the exact fair utility cost for each unit and each utility type, i.e. if air conditioning is $1500 per month for a 10-unit building, and all units are the same, each would pay about $150/month.
Implement billing software for tenants to pay their fees (systems with autopay options are ideal).
Contact the utility company to inform them of the change and set up a “master billing agreement” to pay the company one large, monthly bill for all of the building’s utilities.
RUBS and Vacant Cost Recovery
In addition to RUBS, you may want to consider implementing vacant cost recovery (VCR) for your property. In many cases, property managers or landlords forget to switch over utility billing for new residents. This is often the case for larger apartment complexes with more than 50 or 100 units. In these cases, the property owner is paying the new resident’s utilities out of pocket, which can be quite expensive.
Vacant Cost Recovery (VCR) allows property owners to recover utility costs of occupied units. VCR is implemented by catching occupied units that have not been paying their utilities, deducting the consumption cost of the unit from the master utility bill, and either adding that cost to the resident’s rent or sending them a separate bill for their unpaid utilities.
Over time, this can save owners thousands of dollars in unpaid utility bills. Informing new tenants that a vacant cost recovery system exists will also incentive these tenants to put utilities in their own name, knowing that they could bit hit with a hefty bill later if they do not.
Implementing RUBS in Your Investment Analysis Model
If you are purchasing a non-submetered apartment building or multifamily property and hope to use a value-add investment strategy, you can use RUBS (provided it’s allowed in your area) in your calculation of the ROI/IRR for the property. However, keep in mind that it may take up to a year or more to fully implement the RUBS system, so savings will not be immediate.
In Conclusion: RUBS is Great, But Not For Everyone
For older properties without submeters, RUBS is a great way to reduce landlord utility costs. However, it may not be legal everywhere and may make tenants unhappy.
There are a variety of considerations to think of when determining whether to implement RUBS, including whether to do it at all and whether to do it yourself or have it implemented by a third party. In addition to RUBS, vacant cost recovery is a great way to bill-back tenants who have skirted paying their utilities in the past.