Increasing the cash-flow at an apartment building requires creativity. Although raising rents is the most common way to increase your net operating income, but there are many different strategies to consider. RUBS is one of the easiest ways to increase your cash-flow on your investment.
So, what are apartment rubs? Rubs also known as a ratio-utility billing system, is a billing method used by commercial property owners to re-allocate utility expenses to the individual units. The rubs billing system is a method that uses a pre-calculated formula to charge an amount based on the approximate utility usage of each unit.
One of the properties within our portfolio is a 42 unit building and the units weren’t separately metered. To decrease the overall utility expenses we decided to implement rubs. I’ll walk you through exactly what we did and why we decided to implement rubs.
Rubs Meaning
Ratio-utility billing is a system designed to re-allocate utility charges from the owner to the tenant, to include water sewer and trash, electricity, and gas.
Rubs can be implemented in a variety of commercial-style builds to include: multi-family apartments, condominiums, office, and retail. Rubs is another viable solution to re-allocating a utility expense in a commercial building that isn’t submetered.
Rubs may not charge tenants the exact amount of utility usage they consume. But it’s a great alternative to submetering an apartment building because sub-metering carries a lot of the upfront cost:
- Permits and plans are required
- Re-plumbing of water and sewer lines
- Sub-meter installation
How Are Rubs Calculated
Multiple factors are used to calculate which variables go into place when determining what amount is appropriate to charge the tenant. The factors used in the formula to calculate the total are:
- Occupants per unit
- Square footage permit
- Number of bedrooms
- Number of water fixtures
- Miscellaneous to include, dishwashers, washers etcetera
These factors only apply to re-allocating the water expense from the landlord to the tenant, however, the formula used to determine the cost per tenant varies depending on the utility.
The criteria used for calculating the rubs payment depends on the state and local regulations.
How Rubs Can Increase The Value Of Your Property
One of the many benefits when it comes to owning commercial property is the way in which it’s valued. Residential homes prices are dictated by the market and a single-family will sell for the same price as the others homes within the neighborhood.
Commercial property like apartments is valued based on net operating income, making it easier to increase the overall value of your investment.
Forcing property value can be implemented in many ways; you can renovate and increase tenant rents, or decrease your utility expenses.
Therefore by implementing Rubs and shifting the water cost from the landlord to the tenant it increases the profits with minimal efforts on your part.
Rubs vs Submetering
Submetering a commercial property involves installing a metering device into the existing plumbing lines, these devices monitor the water usage for each individual unit.
Metering each apartment unit allows for a precise calculation of the amount of water used and the exact amount to charge every tenant. The drawback would have to be the cost related to the installation and re-configuration of the existing plumbing.
Sub-meters require electrical power to operate and have to be installed in-between existing plumbing lines. This makes the strategy a much more expensive option in comparison to rubs. Because some buildings require extensive plumbing modification, and others may not meet the guidelines required to convert. Listed below is a chart of the pros and cons when it comes to submetering,
Pros
- The exact measurement of the utility usage
- Tenants are charged for their exact usage
- The third-party company manages the operations
- Tenants become more conscious of there utility usage
- Low operating cost
Cons
- Building designs may not meet the guidelines for the conversion
- Utility expense management companies may cut into your profit
- High initial capital investment
Rubs
Implementing the Rubs strategy with a property is a unique approach to recouping some of the money an apartment owner spends on utility expenses. This method requires little to no up-front cost, making it one of the best options to choose from when re-allocating utility expenses.
But like any other system, Rubs comes with its flaws as well. Because every apartment owner doesn’t charge tenants for water usage, your apartment would be less desired during a tenant’s search. So, it’s important that you analyze the area to determine if other apartment owners have Rubs in place.
Pros
- Low initial capital investment
- Tenants become more conscious of there utility usage
- Payments can be managed by your property management company
Cons
- State and local regulation determine the formula for the amount you can charge the tenants
- Implementing rubs may give your competition a competitive advantage
- Water usage isn’t being metered, the utility payment may not be accurate
The best strategy to implement will depend on your application. If your property is located in an area where rubs are not common, then sub-metering may be a viable option. However, if your property layout doesn’t permit sub-metering because of cost or design, then rubs may be a better option.
According to a recent annual study performed by Bluefield Research, since 2012 water prices have surged 31%, and rose for 8 consecutive years. Choose a method that benefits you and execute, because utility expenses are constantly on the rise.
My Experience Implementing Rubs
Prior to purchasing our 42 unit apartment complex, the water bill was an additional cost on the owner’s behalf. We decided to implement rubs as opposed to sub-metering the units to reduce our capital expenditure budget, here’s how we did it.
Analyze the market
It’s important that you analyze your competition and determine if the apartment owners nearby have either sub-metering or Rubs in place. If neither of the two is in place, then it may not be wise to move forward. This would cause the tenant to lean towards the cheaper renting option ultimately making your apartment less desirable.
Notices of new changes
One of the biggest concerns when it comes to implementing Rubs is communicating the new changes with your tenants. That’s why the owner should give the tenants notices 3-6 months before implementing to ease in the transition of the new changes. Also, you should be clear when discussing the new program with your tenants.
Make sure the new letter you send out includes the goals behind the project: to conserve water especially since we Californians experience severe droughts at times. Information should also be included emphasizing the utility being passed through to the tenants is actually used by the residents. It’s not just another way for the owner to tack on additional charges.
Communicating your goals for your program will decrease the tenant turnover rate. A loss of tenants may occur but, the total amount saved will far outweigh the small bump in vacancy rates.
Rubs Utility Providers
If you prefer not to implement the program and perform the billing, there are companies that offer commercial property owners assistance in implementing Rubs. Listed below are several utility companies that offer the Rubs program:
Results
After informing the tenants and implementing the new program, the renters responded well. There wasn’t a drop in vacancies because the apartments in the area were charging for Rubs as well. Since this apartment deal was a value-add play, the Rubs program increased our NOI and which ultimately increased the overall value of our property.
Rubs Make The Tenant More Aware of Water Conservation
I’ll always remember my dad echoing in my ear to turn the lights off if I’m not using them. As I got older and began paying my own utility bills I finally understood why he would hound me about the lights. Quite naturally if we pay for something with our own hard-earned dollars we tend to value it more.
The same principle applies when it comes to renters if they aren’t required to pay for utilities like water, electricity, or gas. They may waste more water than they usually would. By implementing rubs it allows the tenant to have a direct impact on their utility bills, causing them to be more conservative when it comes to water usage.
What Are The Legalities When Implementing RUBS
Local regulations vary depending on the area, cities like San Jose, Richmond, and Santa Monica are prohibited from enforcing RUBS. In 2016 the SB7 was passed; this law states that commercial properties are allowed to install sub-meters and charge the tenant for metered water usuge. In order to qualify the following guidlines must be met:
- The owner must disclose water the charge prior to the execution of the rental agreement
- The tenant can only be charged for volumetric water billing usage
- Payments must be due at the same point in each billing cycle
- Submeter must be inspected, tested and verified, fully disclosed to the tenant
- The owner must investigate meters if readings are abnormal
After the passing of this law, there has been many questions about implementing Rubs with a mastered water meter. For that reason, if there is ever any doubt about RUBS being allowed in your local ordinance, seek out a real-estate attorney for help.
Conclusion
Increasing the value of your property requires business creativity, there are many strategies you can implement that will increase the NOI. Some of these strategies like remodeling and increasing rents, require up-front capital.
Other strategies like RUBS for example require little to no capital to implement. With minimal research and a plan of action, a ratio utility billing system could become a part of your business plan.