Ask Lucas 019: Can I Split Utilities by the Number of People in Each Unit?
Summary: Danielle asks a follow-up question to episode 18. Wouldn’t it be better to split the utilities by the number of people in each unit, rather than square footage, and what are the pros and cons of doing so? Full Transcript: Lucas: Welcome to the 19th episode of Ask Lucas! I’m Lucas Hall from Landlordology and Cozy, and this is a bite-sized Q&A show where I answer your questions about landlording and property management. If you have a question, just leave a recorded message on landlordology.com/ask-lucas and I’ll answer it in this podcast. Today’s question is from Danielle, but first, let me tell you a little bit about Cozy. If you’re like me, you’ve struggled to find software that works well for your rental business. If you manage your own properties, there’s no better system than Cozy. I think it’s truly the best way for landlords to manage their own properties from application to move-out. With Cozy, you can collect rent online, accept online rental applications, screen your tenants, and order easy-to-understand credit reports. It’s simple and the best part is it’s completely free. No other company on the planet lets you process online rent collection and screen your tenants for free, so check it out. Get Cozy at cozy.co. In this week’s episode, Danielle actually has a follow-up inquiry about last week’s podcast where Elise asked about utilities and how to split that up properly among an apartment building or a multi-family building. Danielle’s question is very good because it simplifies it, but also inquires about the risks and the pros and cons of splitting it up by person. Let’s hear what she has to say. Danielle: Regarding your subject on utilities for multi-family buildings, you’re stating, and I’ve already researched, that the law only requires to divide it by the square footage. However, if you have five people living in one unit, and you have another one person living in another unit, it’s hardly a fair or just amount for the person in a one unit to pay an equal share for someone who has five people living in the same square footage. Wouldn’t it be more reasonable to divide the usage by number of people and then, if there’s five people living in one square footage, then they get it times five, versus the one person that’s living in the same square footage on their own? Lucas: Hey, Danielle. Thank you, thank you, thank you for asking that question. That is a great follow-up to last week’s question. Just to recap, what you’re asking is “Wouldn’t it be more fair and more just to divide the water bill, or the utilities, by the number of people in each unit?” If you had two units, let’s say a duplex, and one side had one person and the other side had five people, wouldn’t it make more sense to make the larger side pay for 5/6 of the utility bill while the other guy only pays for 1/6. To answer your question, yes, that will work, and that can be a very fair way to do it, assuming that the tenants agree to that in the lease. However, I personally try to steer away from that for a number of reasons. Here are the downsides to doing it that way. One is it takes the attention away from assigning a percentage of the utility to a unit by a finite number like square footage, and then it puts it on the actual people. Whenever you start focusing on the tenants themselves and their living behavior, their traits about them, then you also start getting into areas where they could possibly interpret that as discrimination. I will say that familial status is a protected class in terms of discrimination, which means that you can’t discriminate based on the number of people or the number of people in their family. However, there are occupancy limits in each county, so a county government will, in fact, say that you can only have two people for every bedroom, or four people that are not related in a unit in its entirety. There are those limits, but assuming that these tenants are within the occupancy limits, you can’t really discriminate based on family size. So, what happens? Let’s go through some scenarios here. What happens when you have the one person and the five people and you’re making the assumption that each person is using an equal portion of the water. Well, that is rarely ever true. I have a group of tenants who are all roommates. There’s five people in the house, and every single time I go over there to repair something, I never see them. They’re completely gone. They’re young professionals. They work from seven in the morning until nine at night. They take showers at the gym. They don’t even have a dishwasher. They rarely, rarely, rarely ever eat at the house. They’re always eating out and they travel a lot. So, they actually use less water than a guy I have in a studio. They’re not shared units in a multi-family building, but in that particular situation, those tenants are using less water than a single person in another unit. It’s just because of their patterns and their behavior. To take it a step further, let’s say they do have a duplex and there’s five in one, what happens when that single person gets married and then his wife moves in? It makes sense that maybe his bill would double almost, but what happens when nine months later they have twins? Now they went from one to four in a matter of about nine months. I guaranty you that those twins aren’t going to use as much water as an adult. Together they might use a quarter. They take baths and that’s about it. It’s hard to assign a price to a person. When you start getting into numbering people, that’s when you start to get into shady areas and situations where you are going to have to make judgment calls that could easily be interpreted as discriminatory. That’s what I want to stay away from. Another negative to pricing it by person is that it encourages the tenants to hide things from you. I personally care most about getting every adult that’s in the unit on the lease. I want to make sure that they are documented, that I have an application for all of them, and that I know who they are so that I could potentially sue them if I needed to. If they know that their utilities are going to spike if they have another person, then what motivation is there to show you? Their attitude is going to be, “Well, hey, I’ll just try to hide it, but if I get caught, then we’ll just add them to the lease and I’ll deal with it then. Until then, maybe I’ll get a few months out of it that I don’t have to pay extra utilities.” What happens if in-laws come to visit for three weeks? Perhaps they’re allowed to in your lease. Maybe three weeks is okay as a guest. Do they have to pay three times the utility if mom and pop come? These are all things that you have to consider. If you don’t consider it, the other people in the other units will consider it for you. They’ll call you and they’ll say, “Hey, Johnny just had his in-laws in town for a month. Shouldn’t my utilities go down?” It’s a nightmare to handle. In addition to the complaints, you’re also going to have administrative issues. Not only do you now have to track everybody that’s coming and going, which is fine, I need to know that too. When you start getting into an eightplex or a twenty-unit building, you really have to stay on top it. If you want any shot at keeping these utilities in track, you need to know everything. Then you have to adjust your calculations every single month based on the number of people. If there’s any people that are kind of hiding in the woodwork where you don’t know about, you need to track them down and decide, “Am I going to charge them or are they on the lease? Are they not on the lease? What’s happening there?” It really just becomes and administrative nightmare. Those are the reasons why I don’t do it that way, but I suppose if it was a small duplex, and it was a very obvious split, and everybody was okay with it, then I think that would probably be the most fair. It just gets into other issues that I’d rather not touch. I still think square footage is the best way to handle it because that number does not change. It’s a finite number and you can always count on it. You can do that calculation or create that spreadsheet once and then just pop in the utility bill price into your spreadsheet and get the calculations, so you don’t have to tweak it every month. I hope that helps. Thanks again for your follow-up question. Please know that I am not a lawyer. I’m just an experienced landlord who’s happy to help and give my opinion. If you’re looking for legal advice, you definitely need to talk to a lawyer because that’s what they do. Anyway, thanks again. Have a great day.