RUBS: What are they and why are they important?
Utility expenses can make up a significant portion of a property’s overall operating expense and ultimately reduce the amount of net cash flow available to an investor. Higher expenses also leads to a lower NOI and potentially a lower property valuation.
Utility expenses can include electricity, natural gas, water, sewer, trash and occasionally cable and internet. Some properties are separately metered meaning the tenants are billed directly for one or more of these utilities based on their monthly usage. Having utilities separately metered will help keep operating expenses in check as the expense is shifted to the tenant.
For properties where the landlord is responsible for paying for some or all of the utilities, one way to indirectly reduce this expense and increase the property’s cash flow is to implement a RUBS system.
RUBS (ratio utility billing system) is a process by which a landlord will recoup some or all of the utility expense based on a unit’s square footage, the number of tenants in a unit or any combination of the two. A unit that has a higher than average square footage theoretically needs more heat to stay warm and more air conditioning to stay cool, so that unit will likely have a higher gas and electric bill. The unit may also have more appliances and electronics which will utilize more electricity. Some units have in-unit washers and dryers, which again use more energy.
Units that have more tenants tend to have higher water bills as there are simply more people in the unit that use the shower, bath, sink and toilet. Also, the more people within a unit the more trash they typically produce and the more appliances or electronics they might use.
So, what are ways in which a landlord will recoup some of these expenses?
For example, let’s say a building is 10,000 sf and has 10 units so the average unit is 1,000 sf. The property owner may institute RUBS at $0.25/sf/month. The “average” unit will then have a monthly RUBS expense of 1,000 sf x $0.25 = $250. If we multiply this by 10 units, we get $2,500 per month of additional income to the property owner to help offset utility expenses.
If one unit is 1,200 sf and another is 800 sf, the 1,200 sf unit may have a monthly RUBS that is 50% higher than the 800 sf unit (1,200 / 800 = 1.50). The monthly RUBS for the 1,200 sf unit could be $300/month ($0.25 x 1,200 sf = $300) vs. $200/month for the 800 sf unit ($0.25 x 800 sf = $200).
Another example might be a unit that has four tenants versus a unit that has two tenants. The four-tenant unit may have a monthly RUBS of $300/unit versus $150/month for the two-tenant unit, which has 50% of the tenants vs. the four-tenant unit.
Why does this matter?
Well, for starters, RUBS increases income for a landlord. RUBS also allows the landlord to charge a lower monthly rental rate vs. a similar property that might include utility expense in the monthly rent. While the overall monthly expense for the tenant may be the same ($1,000 monthly rent + $250 RUBS for Property A vs. $1,250 monthly rent for Property B), sometimes the optics of the lower monthly rent seems like a better deal to the tenant.
A few cautionary notes. Not all cities, counties and municipalities allow RUBS. Some might allow RUBS, with strict rules and regulations to assure the RUBS practices used by property owners are legal, effective and aren’t predatory towards tenants.
Second, it may be difficult to implement RUBS with tenants that are already in units and accustomed to not having to reimburse utility expenses. These tenants may simply refuse to sign a lease addendum implementing RUBS which may force the tenant to wait until their lease expires to bring in a new tenant that will accept RUBS.
Third, some potential tenants may be turned off by having the pay RUBS which could make the unit(s) less marketable.
Fourth, sometimes the system isn’t fair, meaning a unit that is 50% larger may not use 50% more electricity and gas and a unit that has four people may not use twice as much water or garbage as a unit with two tenants.
The RUBS system is not perfect, however, for properties within municipalities that allow RUBS, it’s a great way for a landlord to recoup some expenses and increase their cash flow.
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