Are Utilities an Operating Expense?

Yes, when the owner pays them. Owner-paid utilities such as water, sewer, trash, gas and common-area electric are operating expenses and come off before NOI. Utilities a tenant pays directly never appear on the property statement. On a single-family rental they are often zero. On an older multifamily building with one meter they can be the third-largest expense.

Owner-paid and tenant-paid utilities

The lease decides it. If tenants have their own meters and accounts, the owner has no utility expense. If the building has one water meter or a central boiler, the owner pays and the cost goes in operating expenses.

Utilities for a vacant unit belong to the owner either way. Count a small amount for turnover periods even when tenants normally pay.

Utilities on a $500,000 rental

The default house assumes tenants pay all utilities, so the line is $0. If the owner pays water, sewer and trash at $150 a month, that is $1,800 a year. NOI falls from $28,892 to $27,092, and value at 6.5% falls by about $27,700.

On a multifamily building with owner-paid heat, utilities can run 10% or more of collected rent. That is why two buildings with the same rent roll can have very different NOI.

Bill-backs and RUBS

Many multifamily owners recover utility costs with submeters or a ratio utility billing system (RUBS), which splits the building's bill among units by size or occupants. The recovered amount is income, usually in "other income". The full bill stays in expenses.

The net effect on NOI is the cost minus what you recover. Check that a seller's statement shows both sides. Some show the reimbursement as income and leave out the bill.

Setup	Utility expense	Utility income	Effect on NOI
Tenants pay directly	None	None	None
Owner pays, no bill-back	Full bill	None	Lowers NOI by the full bill
Owner pays, RUBS or submeter	Full bill	Recovered amount	Lowers NOI by the unrecovered part

Run the numbers on your property

The calculator below is loaded with the $500,000 example. Change any line to see how utilities moves NOI and value, or read the full operating expense checklist for every line that belongs above NOI.

Itemized income and expense lines

Income

Monthly rent (all units)$Scheduled rent at full occupancyUnitsFor per-unit figures. 1 for a house or condo.Other monthly income$Parking, laundry, pet rent, storage, utility billbackVacancy and credit loss%$2,400 a year. 5 to 8% is typical.

Operating expenses

Annual property taxes$Use the bill after reassessment, not the seller'sAnnual insurance$Landlord policy, plus flood or wind where neededHOA dues (monthly)$Owner-paid utilities (monthly)$Water, sewer, trash, gas, common-area electricOther monthly expenses$Lawn, snow, pest, licenses, legal, accounting

Price and market (optional)

Purchase price or value$Leave at 0 if you only need NOI. Turns on the cap rate.Market cap rate%What comparable properties sell at. Values the NOI.

Net operating income (annual)

$28,892

$2,408 a month

Typical expenses · 37% ratio

Typical. 30 to 45% of collected income covers expenses, the range most single-family and small multifamily rentals land in with every cost counted.

Income statement

Gross scheduled income: $48,000
Vacancy and credit loss: -$2,400
Effective gross income: $45,600
Property taxes: -$6,000
Insurance: -$2,500
Maintenance: -$2,280
Capital reserves: -$2,280
Management: -$3,648
Total operating expenses: -$16,708
Net operating income: $28,892
Expense ratiooperating expenses / effective gross income: 36.6%
NOI marginNOI / effective gross income: 63.4%

What this NOI is worth

Value at a 6.50% cap rate: $444,492
Cap rate at this price$28,892 / $500,000: 5.78%
Priced above that value by: $55,508
Gross rent multiplierprice / gross scheduled income: 10.4

What moves it

Each $100/mo of rent addsof annual NOI after vacancy and percentage expenses: $935
Each point of vacancy costsof annual NOI: $394
Each $1,000 of NOI is worthat a 6.50% cap rate: $15,385

Utilities and NOI questions

Are utilities included in NOI?

Owner-paid utilities are, as an operating expense. Tenant-paid utilities are not, because they never pass through the owner. Reimbursements from tenants are counted as income.

Are utilities a fixed or variable operating expense?

Mostly variable, because they move with occupancy, weather and rates. Base charges like minimum water or trash service behave more like fixed costs.

Should I include utilities in NOI on a single-family rental?

Only the ones you pay. Most single-family leases put utilities on the tenant, but many cities bill water, sewer or trash to the owner. Check the lease and the local utility rules.

Sources: Wikipedia: Utility submetering