Splitting utility bills with an unauthorized suite
I had a recent buyer of mine ask me how I ‘normally’ charge tenants for utilities, when it’s an unauthorized suite. I realized that with the growing amount of NEW real estate investors purchasing homes with unauthorized secondary suites, this must be a common question on their minds.
What is an unauthorized suite?
Unauthorized suites are very common to see when I browse through MLS listings for buyers. An unauthorized suite is different than a legal suite and also different than an illegal suite. For starters, you can only have a secondary suite in your home if your property is correctly ZONED to allow for secondary suites. If the zoning doesn’t allow for a secondary unit, but you add one anyway, that is an illegal suite. The same goes if your home is zoned for one secondary unit, but you put two units in, one of those is illegal.
Once you know that you are properly zoned for a secondary suite, you will take the appropriate steps of having a suite built and ideally, you use a contractor or qualified tradespersons so that the appropriate permits can be pulled for electrical, plumbing etc. Also, you are required to use fire separation materials and have enough windows, etc. The city inspects the suite and if up to standard, you are passed as a legal suite. When it’s a legal suite, you also have separate electrical meters for each unit in your home, which makes your life easier because then the tenant signs up for his/her own utilities account.
Mine isn’t a legal suite, so now what?
Your unauthorized or illegal suite will not have two separate utility meters, so your electrical bill will be addressed to you, the owner of the house. The bill will be for the usage of the entire house.
If you have an upstairs tenant and downstairs tenant, neither of the two tenants will want the entire bill in their name. That would be unfair to ask of either tenant. It shouldn’t be their responsibility to collect a portion of the bill from the other tenant. Plus, if the other tenant doesn’t co-operate and pay on time, then it’s the named tenant on the bill that is responsible to pay the amount in full.
The utilities bill should stay in your name and you are ultimately responsible for timely payment. Depending on the size of the upper unit of the home vs. the lower unit of the home, along with the number of tenants in each unit, you will determine a percentage that each unit should pay for utilities. For example, the upstairs is a 3 bedroom unit and downstairs is a 1 bedroom unit, you could say that upstairs pays 75% and downstairs pays 25%. For one of my homes, I charge 65% for upstairs and 35% for downstairs. Because the home is in the Okanagan and water usage in the summertime can get out of control, I charge the water bill to the tenants, as well as the electricity and the gas.
I recommend checking out other rental listings in your city or neighbourhood to see what other landlords are doing.
Discussing it with your tenants
When you advertise your listing, you should always state that: “XX% of utilities are to be paid by the tenant”. I would recommend even putting in brackets what that includes (water, hydro, gas), so that it is well known in advance. I would also include it, in writing, in the lease agreement.
Cable and Internet
It’s easy (or easier) to have the cable and internet split for each unit. This simply requires you to call your cable/internet provider at the time of building the suite and having them run their lines. So there shouldn’t be a need to break down the cable or internet bill. If so, since cable/internet is a fixed amount each month, just build this into your rental price and say that internet is included.
How to break down the bills and charge your tenants
Given that I have an accounting background, I am used to having to charge out bills to commercial tenants and then calculate the difference owing at the end of the period. So I understand that not everyone is savvy with Excel and will have an easy time with tracking the bills. But this is the easiest way that I have found to do it.
Step 1: Generate some rough figures of what you EXPECT each bill to be, that you are charging back to the tenants. Total up the figures to get an estimated dollar amount for each month.
Step 2: Tell your tenants to pay XX amount each month, they can include it with the first of the month’s rent, or they can pay on another set date.
Step 3: When your hydro, gas, water, and any other bills come in that your tenant is paying you for, write these down or track them in a spreadsheet. It starts to become a bit tricky because some bills are billed monthly, others are bi-monthly and others are quarterly.
Step 4: Calculate how much the bills are in total. Then calculate how much your tenants have paid you up until then. This is called a TRUE UP and you can do this at any time (ie. every 3 or 6 months). You now either owe them money because they overpaid (so they can pay you less for next month or you can actually refund them) or they owe you money.
Alternatively, you can have your tenants pay their % each and every time a bill comes in.
Hope this helps. If you have further questions or comments, please email me at email@example.com