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When you operate an all-inclusive rent, you usually charge a fixed monthly fee for the bills (electricity, water, internet, condo fees, etc…).
The issue is in the balance. You charge a fixed amount to the tenant, but consumption is not fixed. Also, bills come across different periods: bimonthly, trimestral, semestral, or annual.
Add to the equation that tenants do not stay for a fixed amount of months and you have quite a tricky problem to solve.
Starting from our experience in property management, here is what it is usually done to address this issue.
1. Do not do the balance at all
Some avoid the problem at its root, and it is not too bad of an idea. Provided that you are not making profits out of bills consumption, you can agree with the tenant a fixed monthly amount for the consumption.
Usually, during summer you will pay more and during winter will pay less. At the end of the year, the fixed fees and the tenant’s expenses will balance.
This strategy allows you to not calculate any balance, saving you time and money
Some tenants may resist this solution, wanting to pay just what do they consume
This solution has been taken from the hotellerie industry, and is best applied for premium rents
2. Do the balance on presumed amounts
When the tenant checks out, it is almost impossible having all the bills collected. So, some make a forecast of the consumption and agree on that value with the tenant. This is particularly useful if you have meter readings, so that you can calculate the pro-rata of each bill accordingly.
Unfortunately, this is not valid for each bill. Condo fees are usually annual and there is no reading for that.
This strategy is fair for the tenant and allows you to close his position at the end of the lease
The calculation is made on a forecast, so you can still find some resistance from tenants wanting to pay as much as they consume
If you do condo housing, probably this is not the best solution for you
3. Do the balance when you have all the bills
You can wait to have all the bills to do the balance. In this case, when returning the deposit, you keep a part of it to cover any additional cost deriving from the bills.
This is a fair method for the tenant, because he pays exactly as much as it consumes.
The complexity of managing it is high. You need to keep open tenants’ positions even after they exited your apartment, having to come back to them after months and recuperate all the calculations.
Our solution: do like phone companies
Talking with landlords and property managers, we found a solution to make everyone happy.
Phone companies today offer an all-inclusive plan. You can call and navigate as much as you want, for a fixed or tiered price.
You can do the same, offering a true all-inclusive rent, including unlimited usage of electricity, bills, everything.
The caveat
If you read on the terms and conditions of your contract with your provider, it is not actually an all-inclusive plan. You will always have tiers or limits of usage.
Here, you can do the same, stating that if the consumption exceeds certain thresholds, the tenant will pay for the difference.
You will see from the first months, and the first bills, who are consuming more and who is consuming less. This will allow you to spot the tenants to whom you will get paid more.
Value for everyone
This strategy brings value to everyone:
- the tenant is not worried about paying per consumption, as he has an all-inclusive formula. If you think about it, hotel chains do the same, and we learned from them
- you avoid the complexity of calculating complex balances on actual or forecasted consumption
Good for your accounting as well
This solution is also good for your accounting. Having fixed incomes for bills each month, you will also be able to easily forecast your cashflows, calculating what is the fair fees to charge to each tenant on a monthly basis.
How to manage all of this?
Once we have understood that the all-inclusive package works and that offering additional services allows you to maximize the total tenant value, we are left with a question: how do I manage the increased complexity of offering additional services?
The solution is also taken from hotels. Get a management software, allowing you to manage all the different aspects of your daily rental operations. Without technology, or doing all of this manually, you will be lost.
What should I look at when picking a rental property management software?
One simple thing: it has to be complete. In fact, you should be able to manage tenants, properties, maintenances, communications, deadlines, services, owners, and any other aspect of property management.
EXTRA | A look from where we learnt: hotel companies
The all-inclusive formula is growing among hotel chains and developers, because there is value for everyone. The guest is not worried about anything, he knows that he pays something upfront and can consume as much as he wants. The hotel offers an additional and differentiated service to the guest, ensuring higher bookings and, as we will see, profits.
The ‘hold-up problem’
The all-inclusive formula solves the ‘hold-up’ problem for both guests and hotels. The hold-up problem means that, because the resort and the customer are agreeing to a set cost for everything upfront, both parties benefit.
The hotel benefits because gets the client to spend money where otherwise he would have not. Don’t you use the pool? No worries it is included! [and I will charge you a fixed amount for that]. This applies the same to everything.
As a result, the hotel is able to get a larger share of the guest’s value.
The value for the hotel
There is one big chunk of value for the hotel: the information of knowing in advance where the guest will spend his money.
What does it mean? It means efficiency on operational costs. As a matter of fact, the hotel controls the variable costs of the equation, because they decided what to offer in the all-inclusive upfront.
Thanks to that, they can also charge more. All-inclusive is an additional service that hotels offer, and they charge a premium for that. For the guest, the all-inclusive package is an experience, and they are willing to pay an extra for it.
The value for the guest
This is even simpler: relax and peace of mind. Again, they do not have to worry about anything. They can consume as much as they want, everything is already paid upfront.
What about the bills?
Let’s face reality, no one will leave the water running all night, leave the lights on, or turn the heating like they are in the Caribbean.
Even if you will find someone doing that, usually the ‘low utilizes subsidize the high utilizers’. This means that you may lose some money on some tenants, but all in all, you will make a profit.
What they do that you also can do
Hotels do not stop here, as their goal is to maximize the total guest value. You should do the same with your tenants.
You can sell additional services, such as discount coupons on restaurants, tickets for events, access to museums, discos, access to study halls and rooms if you work with students. All in all, you can provide everything that is in line with your tenants’ target.
This will be the outcome:
- your tenant is happier, he will refer your brand to his friends and you will benefit from that
- you will earn even more from your tenant, maximizing his total value
