Anyone who has ever paid for housing knows that utilities can add a significant expense to your monthly budget. However, as a landlord, how do you make sure the utilities on your investment property don’t cut into your bottom line?

There are three ways to handle utilities payments at your investment property and a number of considerations to take into account to ensure the greatest return on your investment.

Three ways to handle utilities at your rental

Include utilities as part of the rent. This is typically a flat fee per month, and you keep the utilities in your name. This gives you ultimate control of the utilities, but you’ll need to do a lot of research to determine exactly how much you should add to the rent each month. In addition, your monthly rent will appear higher than other comparable properties, since your utilities are included in the price. When renters search, they search with a price in mind. Some very qualified renters may never even see your property because it will be filtered out of their search. You should work with a local legal professional and your local building inspector’s office to make sure the fee you charge for what utilities is permissible in your area.

Charge a monthly utility fee. Again, this keeps utilities in your name, giving you control of your property. However, it’s up to you to manage the additional billing and bookkeeping. The monthly fee can be flat or fluctuate, depending on what is written into your lease agreement. Again, make sure to work with a legal professional to confirm the fee you charge is in accordance with local and state laws.

Make the tenants responsible for utilities. Tenants put the utilities in their name and are responsible for payments directly. Many times landlords will use a combination of methods, especially with utility services such as sewage and garbage pickup, or if there is a utility that you can’t easily put in a tenants name.

Each of these options has its own set of pros and cons. You want to be confident that the cost is completely covered so your investment can command the best ROI possible.

The most important thing to remember is however you decide to have utilities paid, make sure it’s in the lease agreement that the tenant signs. This way there is no confusion if someone is late on a payment or skips out on a bill.

Tip: You can now collect rent and one-time payments online with Zillow Rental Manager.

The type of property matters

Do you own an older home that was converted into a three flat or did you recently purchase a new construction duplex as an investment? The type of property matters because when it comes to utilities, meters matter. How your property is metered will determine how you charge for utilities. Often an older home that was converted into multiple rental units has one meter for the entire property. It may be cost prohibitive to have the meters split, so you’ll need a way to fairly account for utilities used and a monthly fee to recoup your costs. On newer properties, you can typically have a sub meter installed. Regardless of the solution, make sure you know exactly how you account for monthly utility costs, because a good tenant will want to know. Also check with local authorities and a legal professional to ensure that any solution you come up with is in line with local and state regulations.

What is your tolerance for risk on your investment?

While it may seem like a no-brainer to include a monthly utilities fee as part of the rent you charge, there are several variables that make this difficult. Yes, you keep control over your property, but you also assume liability and a good amount of risk, even with the most qualified tenants. Let’s say you charge a flat monthly utilities fee of $50 for water, gas, electric, trash removal and sewage. This is laid out clearly in your lease agreement. So, what happens if your tenant consistently uses $250 worth of utilities each month – running up the electrical and water bills? You’re out $200 each month and your return on your investment suffers. If your name is on the utilities bill, you are responsible for the payment, even if your tenant is late or skips out on a bill entirely.

Qualified tenants can put utilities in their name

While some tenants may hem and haw about the hassle of changing utilities into their name, it’s often worth the extra time it takes to negotiate this arrangement. It insulates your level of risk while also creating a sense of responsibility for the tenants. If you include the utilities as a flat fee in your rent, where is the incentive for tenants to conserve energy or close the windows when the heat is on? It’s like an all-you-can-eat utilities buffet! Instead, if they are on the hook for payments, they likely will be smarter about their utility usage, and they’ll be more likely to report any problems such as a running toilet or leaky windows. In addition, some tenants may have a history of no-payments with a utilities company, and may not be able to put the services in their name. You’ll want to know this ahead of time to determine if that is a risk you are willing to take on or not when you find a new renter.

What’s the norm in your market?

Before deciding which method is the best for you, research your market. Search several similar properties near you to determine how they handle utilities payment and how much they charge.

The bottom line? No matter which way you decide to charge for utilities, make sure you explicitly lay out who is responsible for what payments in your lease agreement.

NOTE: This resource is provided for informational purposes only. Zillow Group, Inc. does not make any guarantees as to the sufficiency of the information contained in this resource or their compliance with current, applicable laws. This article is not a substitute for the advice or services of an attorney; you should not rely on this article for any purpose without consultation with a licensed attorney in your jurisdiction.