Utility Management: A Powerful Way to Boost NOI

Last modified on June 8th, 2021
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As the recovery continues and we begin to return to “the way things were,” now is an opportune time to implement strategic changes to property operations in order to improve net operating income (NOI) across your portfolio. Utilities represent the third largest operating expense for multifamily properties, and are a prime target for savings. By passing utility costs through to residents, multifamily operators can dramatically reduce expenses, boost NOI, and incentivize resource conservation.

The world of billing residents for utilities is both frequently and inconsistently regulated, and utility bill-back can be more easily said than done. What’s more, while some properties have individual submeters for each unit accounting for water consumption with daily, or even hourly measurements, others have one meter for the entire property. Deciding on the best approach to billing, making sure it’s compliant with local regulations, and administering the program can be overwhelming.

This is where automated utility management software comes into play, and the benefits are numerous. It streamlines the entire billing process and provides detailed analytics so that you can truly wrap your arms around your utility bills. These software solutions also boost employee satisfaction and morale by eliminating the need for repetitive, manual, error-prone data entry tasks.

Typically, there are three ways to recover utility expenses, and they can all be greatly enhanced with utility management software.

Flat Fees

Charging residents a flat fee to cover utility costs is the easiest option, but it is also the least accurate. Guessing, however educated, a property’s utility expenses when drafting leases usually ends in either over or underbilling.

Ideally, your utility recovery would track the fluctuation of your expenses, and correlate a resident’s charge to their consumption. RUBS and submeters do this, and which one you choose depends on the particulars of your property. 

RUBS

A Ratio Utility Billing System (RUBS) allows a property manager to pass through the full cost of utilities by dividing up each bill among all residents in the property. RUBS calculations break down the cost of a bill and allocate it to residents based on unit-specific factors like occupancy and square footage. Instead of a one-size-fits-none flat fee, resident charges are weighted to reflect their share of consumption more accurately. With increased accuracy and recovery, however, comes increased complexity. Managing the various allocation rules, ensuring they comply with local ordinances, and calculating the charges manually can represent a significant job for property staff. 

Submeters

In an ideal world, all of your units would be submetered, allowing charges based on exact consumption. Charging based on usage is the most accurate and transparent way to bill residents, not to mention sustainable as well. A National Multi-Housing Council and National Apartment Association study revealed that properties that use submeters to distribute water costs had a reduction of 27% in average water consumption. 

Similar to RUBS, however, with accuracy comes complexity. While most modern submeters provide online portals to pull readings, an older property may well have meters that can only be read manually. Once the read data is in hand, your team must still investigate applicable tariff schedules. Only then can they perform the calculations and finally post charges.  

Billing back utilities can have a massive impact on NOI, and there are widely accepted methods for doing so. Setting up and managing these systems over a large portfolio, however, is a complicated job in itself. The payoff is there, but does your team have the bandwidth to manage the billing program?

Utility Management Software

The bedrock of good utility management is comprehensive utility billing data. The best products eliminate human data entry entirely. How? By gathering bills electronically (having the utility company send your master bill directly to the software provider), which then extracts all relevant fields and uploads the information into your accounts payable automatically.  

While the bills head off to AP for you to approve and pay, the billing data is processed according to property-specific configurations by running it through an integrated RUBS or submeter calculator (depending on your billing system). The property manager is then given a chance to review, and once approved, the charges are posted in the resident ledger for payment. It’s a seamless, labor-light way to recoup utility charges.

Real-World, Bottom-Line Benefits

When built specifically for use on your current property management platform, utility management software can be a game-changer, especially when managing utilities at scale. Brandi Brophy, a property manager at Pacific Capital Management (2,000 units across the West Coast) explained how utility management software enhanced their RUBS:

 “For a couple of our buildings, ratio-utility billing was written into the leases when we took over management. It can be a very complicated process for one person to track using spreadsheets and we were using an outside company that wasn’t cutting it.

Now that we have the whole process in AppFolio, we have improved our NOI by billing the utilities back to the tenants, never missing a charge. With flat fees, they can often be a lower charge than actual utility amounts so by using RUBS, we are covering a higher percentage of utility cost on these properties and it’s having a greater impact on our bottom line. We’re earning over a thousand dollars a month of additional income, $12,000 per year, which has had a significant impact on our asset value.”

The Added Value of Utility Management Software

In addition to helping implement a new utility bill-back program or enhancing your current system, automated data collection and analytics uncover and highlight usage spikes or other variances, helping property managers catch and fix issues faster, while spending less time doing manual analysis. 

2B Living, a San Francisco Bay Area property management firm with over 1,500 units under management, has gained more control over their utilities by preventing spikes from getting out of hand. As Scott Cattaneo, the company’s Director of Accounting told us:  

“It was kind of a pain point for us for a long time. We would take on a property and just continue what they did before. With AppFolio Utility Management, it has made managing our utilities tremendously easy. We get a weekly email explaining any spikes in utilities at the property. Before, we’d look at prior bills, which means a leak could have been going on for weeks. Now we are nipping issues in the bud immediately. We can really control those spikes now.” 

Closing the Tap

In summary, if you are experiencing NOI compression and raising rents is not an option, billing residents for their utility consumption is a powerful way to turn an expense into income. If you are already doing so at scale and find yourself hampered by manual processes, consider adding utility management software: It makes your teams more efficient, and your properties more profitable.

Please feel free to contact our team with any questions about utility management software in general, or with specific questions about how AppFolio’s solution differs from the other solutions on the market. We’ll get in touch right away.

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