Key Takeaways:

  1. A ratio utility billing system (RUBS) is a method for calculating tenants’ utility bills in multifamily properties that lack submeters in each unit.
  2. Though there is no single RUBS formula, factors such as a unit’s square footage, number of residents, number of bathrooms, and the presence of devices like washers and dryers are often used in the calculation.
  3. RUBS can offer numerous advantages for property owners, including decreased expenses, increased net operating income, more stable cashflows, and more marketable units.

Utility costs—like water, gas, and electricity—can be a significant expense for owners of multifamily properties. Owners can recoup these costs in different ways. One popular method is the ratio utility billing system (RUBS), which involves allocating a property’s collective utility costs according to a predetermined formula and then billing tenants for their respective share of costs.

Learn more about the RUBS method and whether it might be right for your property.

What is a Ratio Utility Billing System?

A ratio utility billing system, or RUBS, is a method for allocating utility costs in multifamily properties that lack submeters in each unit. Property owners or managers can implement RUBS themselves, though many utility companies also offer the service. Either way, with RUBS, tenants receive a utility bill and are responsible for paying it directly.

With the RUBS method, a property’s collective utility bills are divided proportionally among tenants in a way that attempts to account for varying levels of utility consumption from unit to unit. RUBS does this by making assumptions (more on this below) about how units of different sizes, layouts, and occupancy numbers will consume utilities at different rates.

When considering whether to use RUBS, it is also helpful to be aware of the alternatives. These include:

  • Installing submeters (though this can be prohibitively expensive in buildings with many units) and then having utility companies bill tenants directly for their consumption.
  • Paying utility bills on tenants’ behalf and then charging higher rents to compensate (though higher rents may make units less marketable).

What Does RUBS Cover?

RUBS can cover a range of utilities, such as water, gas, electricity, and trash.

How is RUBS Calculated?

There are many ways to calculate utility bills with RUBS. Typically, the more factors that are considered, the more accurately a RUBS-produced bill will reflect the varying utility consumption patterns of tenants. Such factors often include:

  • Unit size. Larger apartments usually consume more utilities than smaller apartments.
  • Unit occupancy. Larger households usually consume more utilities than smaller households.
  • Number and type of appliances. Units with devices like washers and dryers usually consume more utilities than units without such devices.
  • Number of bathrooms. Units with multiple bathrooms usually consume more utilities than do units with fewer bathrooms.

Consider a simple example. A hypothetical, 10-unit property has a monthly utility bill of $2,000. Unit 1 is a studio, and has only one resident, no washer or dryer, and a single bathroom. With the RUBS method, you might decide that unit 1 is responsible for 5% of utility costs, or $100. Meanwhile, unit 2 has two bedrooms, three residents, a washer and dryer, and two bathrooms. Unit 2 might then be responsible for, say, 15% of utility costs, or $300. And so on.

RUBS Benefits and Drawbacks for Multifamily Property Owners

There are many potential benefits to using RUBS to calculate your tenants’ utility bills, but there are potential drawbacks, too. Before deciding whether to implement RUBS, it is a good idea to carefully consider both advantages and disadvantages.

Benefits of RUBS for multifamily property owners can include:

  • Reduced expenses. When tenants pay their utility bills directly (the case with RUBS), owners have lower operating costs than when owners pay utility bills on behalf of their tenants. RUBS also allows owners to avoid the often-considerable expense of installing submeters.
  • Greater predictability. When the cost of utilities is included in tenants’ rent (the case without RUBS or submeters), owners must forecast their utility costs when setting rent. If utility costs rise faster than expected, owners of such properties could see their cash flow and income suffer until they renegotiate rents the following year.
  • Greater marketability. When a tenant pays utilities directly, the cost is not included in the advertised rental price of a unit. This results in a lower advertised price, which can make the unit more appealing to prospective renters.
  • Increased property valuation. Lower operating costs can increase net operating income (NOI); higher NOI, in turn, can increase a property’s value.
  • Reduced environmental impact. Having to pay utility bills directly may make tenants become more aware of their consumption habits—and, potentially, encourage them to use utilities more efficiently.
  • Greater perceived fairness. By accounting (albeit imperfectly) for tenants’ varied consumption habits, RUBS may be viewed by tenants as a more equitable billing method than one that does not account for such differences.

Drawbacks of RUBS for multifamily property owners can include:

  • Local bans and restrictions. Some jurisdictions (such as Miami-Dade County) prohibit property owners from using RUBS, while others heavily regulate its use. California, for example, counts RUBS payments as part of tenants’ rent—a regulation that can affect rent-setting decisions in rent-controlled units.
  • Pushback from existing and prospective tenants. If it is standard for property owners in a particular area to include certain utilities in the rent (such as water and heat), current and prospective tenants may resist the change—especially if they do not receive a commensurate reduction in rent.
  • Costly to enforce compliance. In properties with submeters, utility companies can simply turn off utilities in individual units when tenants fail to pay their bills. But because RUBS is used in properties without submeters (and where service thus powers the entire property), turning off the utilities for a tenant who does not pay will also result in the loss of service for residents who do pay. Another way to enforce compliance with RUBS—eviction—is costly as well as time-consuming.

How to Implement RUBS

If you decide to adopt the RUBS method, the following steps can help ensure a successful implementation:

  1. Audit your property and determine the objectives of your RUBS program. Ensure that the information on file about each household is accurate.
  2. Decide whether you will create a RUBS formula on your own or in consultation with your utility companies. If you choose the latter, utility companies can then bill tenants directly.
  3. Give as much advance warning as possible to tenants of the change—six months is ideal. For smoother implementation, written notice can be followed up with phone calls to each household to explain the rationale for the new policy and how it will work.
  4. Issue lease addendums to tenants.
  5. After the notification period is over, send utility bills directly to tenants each month.

Lument solutions for multifamily investment

Lument offers a range of solutions to investors in multifamily properties—from conventional multifamily to affordable housing to small balance multifamily to manufactured housing. Drawing on its deep understanding of different asset classes and its outstanding record of delivering results, Lument’s multifamily clients receive the highest levels of service, from application through closing and servicing.

Lument’s small balance loan experts, for example, offer structures finely tailored to the needs of investors in lower-cost properties: since 2016, Lument has enabled more than $4.8 billion in small balance transactions; in 2021, Lument was also named a top five Fannie Mae and Freddie Mac producer of small loans.

Today, Lument continues to improve its offerings in innovative ways. Lument’s Leap to Loans tool, for instance, provides instant quotes for multifamily property loans of $1 million to $7.5 million; quotes include options from Fannie Mae and Freddie Mac, as well as balance sheet options. The easy-to-use tool also features educational resources to help investors learn more about commercial real estate.

FAQs

What is RUBS income in commercial real estate?

The use of RUBS—a.k.a. a ratio utility billing system—in commercial real estate can reduce operating costs for a property owner, thereby increasing net operating income (NOI) from the property.

Is RUBS legal in Los Angeles?

Yes, RUBS is legal and regulated. In Los Angeles and throughout California, tenants’ RUBS payments are officially counted as part of their rent, which can limit property owners’ ability to increase rents in rent-controlled units.

What are the best practices for using RUBS in commercial real estate?

When implementing RUBS, best practice suggests that property owners adopt a billing formula that accounts as closely as possible for varying levels of utility consumption from unit to unit. Other best practices around implementation include auditing your property and determining the objectives of your RUBS program, ensuring that the information on file about each household is still accurate, and giving ample advance warning to tenants before introducing RUBS.

RUBS vs. submetering

With both RUBS and submetering, tenants pay their utility bills directly. An important difference, however, is that submeters allow tenants to be billed precisely for their utility consumption, while RUBS uses a formula to estimate tenants’ consumption from unit to unit.

Submeters are thus more likely to encourage residents to economize on their use of utilities; on the other hand, submeters can be prohibitively expensive to install in properties with many units. The use of RUBS, meanwhile, is not legal in all jurisdictions and can be heavily regulated in others.

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