RUBS Income in Real Estate: The Ultimate Guide

July 6, 2023

Adam Hoeksema

Welcome to our in-depth exploration of RUBS income in real estate, your ultimate guide to understanding and harnessing the power of Ratio Utility Billing Systems. Whether you're a seasoned landlord seeking innovative ways to streamline your expenses or a budding real estate investor trying to maximize your returns, understanding RUBS can be a game-changer. It's a tool that can promote sustainability, provide fair utility cost allocation, and even help improve your bottom line. However, its implementation isn't without complexities. In this guide, we'll dive deep into what RUBS income means, how it works, its potential advantages, and challenges, as well as key considerations and regulations you need to be aware of.

Given that our clients working on a pro forma with our multifamily apartment financial model template are always looking for ways to increase their net operating income and ultimately their IRR of a given property, I wanted to take a deep dive into RUBS income and help walk you through what you need to know and how it might be a helpful tool for your property.  In this blog post I plan to tackle the following:

With that as a guide, let’s jump in!

What is RUBS Income?

RUBS Income, standing for Ratio Utility Billing System income, refers to the income a property owner or landlord receives from tenants to cover utility costs. The RUBS is a cost allocation method used to assign utility costs to tenants when individual metering isn't practical or possible.

In a typical RUBS arrangement, each tenant's utility bill is calculated based on certain factors such as the size of the unit, the number of occupants, or a combination of these and possibly other factors. These bills are then paid to the property owner or landlord, becoming part of their RUBS income.

The goal of RUBS is to fairly distribute utility costs, encouraging more responsible utility use by tenants since they directly share the cost. It's also a way for property owners to recover the expense of utilities, which might otherwise be a significant portion of operating costs.

However, it's important to note that the implementation of RUBS must comply with local and state regulations. The specific methodology for calculating bills and the types of utilities that can be included in a RUBS program can vary widely depending on the jurisdiction.

What are the pros and cons of a Ratio Utility Billing System?

Implementing a Ratio Utility Billing System (RUBS) can offer several benefits, but there are also potential drawbacks to consider. Let's explore both sides of the coin:

Pros of RUBS:

Cost Recovery: RUBS allows landlords to recover utility costs instead of absorbing these expenses as part of operating costs. This can lead to a significant reduction in property operating expenses and an increase in the net operating income.

Encourages Conservation: Since tenants will be directly responsible for a portion of the utility costs, they may be more motivated to conserve energy and water, contributing to overall environmental sustainability.

Easy Implementation: RUBS can be easier to implement in older properties where the installation of sub-metering systems isn't feasible due to structural limitations.

Flexibility: RUBS allows for the allocation of costs based on multiple factors, including unit size, number of occupants, etc., providing a degree of flexibility.

Cons of RUBS:

Accuracy: RUBS does not reflect the actual utility usage of individual units as it's based on an allocation formula. Tenants may feel it's unfair if they believe they're being charged more than their actual usage.

Legal Considerations: The laws regarding the use of RUBS vary by state and municipality. Some places may have strict regulations or may not permit the use of RUBS, making it crucial for landlords to familiarize themselves with local legislation.

Administrative Burden: The process of calculating and billing tenants can be complex and time-consuming, and may require the use of a third-party billing company.

Tenant Pushback: Tenants may not react positively to a RUBS system, especially if it's introduced after they've moved in. This could potentially lead to tenant disputes or turnover.

As with any decision in property management, the choice to implement a RUBS must be weighed carefully, taking into consideration the property characteristics, local regulations, and potential impacts on tenant relationships.

Unfortunately there is not one simple map, list or database that shows whether a Ratio Utility Billing System is legal based on your specific city or state.  There are a couple of options for you:

  1. Check with a local real estate attorney in the area of your property. That attorney is likely to be most familiar with the RUBS regulations in your area. 
  2. Check with your state’s public utility commission
  3. Contact your local National Apartment Association affiliate

Once you have determined whether a RUBS is legal in your area and have decided to move forward, let’s look at the steps to implement a RUBS. 

How to Implement a Ratio Utility Billing System (RUBS)?

Implementing a Ratio Utility Billing System (RUBS) requires careful planning and attention to detail. While specific procedures might vary depending on local laws and regulations, here are general steps you could consider:

  1. Understand Local Laws and Regulations: Before you consider implementing a RUBS, it's essential to understand the local laws and regulations in your area. Some jurisdictions have specific requirements or restrictions related to RUBS, so you'll want to ensure you're in compliance.
  2. Develop a Fair Allocation Formula: The next step is to develop a fair and reasonable allocation formula for dividing utility costs among tenants. This could be based on factors like unit size, number of occupants, or a combination of different factors. The specific method used will depend on what's permissible under local law and what's appropriate for your property.
  3. Update Lease Agreements: Include clear, understandable language in your lease agreements that explains the RUBS and how utility costs will be allocated. It's essential that tenants understand this system before they sign the lease.
  4. Notify Existing Tenants: If you plan to implement RUBS for existing tenants, you'll need to provide them with clear notice and possibly modify their leases. The requirements for this process can vary, so it's crucial to understand local regulations.
  5. Implement Billing: Determine how you will calculate and bill each tenant for their portion of the utilities. This might involve manual calculations or the use of a third-party billing company. You'll also need to decide how often you'll bill tenants.
  6. Handle Disputes: Have a clear process in place for handling any disputes that arise related to utility billing. This might involve reviewing the tenant's bill, explaining the allocation process, and making adjustments if necessary.
  7. Review and Adjust: Regularly review the system to ensure it's working effectively and fairly. You might need to make adjustments over time, especially if there are changes in utility costs or occupancy.

What is an Example of a RUBS Allocation Formula?

Here is an example of how a basic RUBS allocation might work, using the number of occupants as the allocation factor:

Let's say you own a building with 5 units. The units are occupied as follows:

Unit 1: 2 occupants

Unit 2: 1 occupant

Unit 3: 3 occupants

Unit 4: 2 occupants

Unit 5: 2 occupants

In this case, there are a total of 10 occupants in the building.

If the utility bill for the entire building for one month is $1000, you would divide this total cost by the number of occupants to get the cost per occupant. In this case, $1000 / 10 occupants = $100 per occupant.

Then, you would multiply the cost per occupant by the number of occupants in each unit to get the utility cost for each unit:

Unit 1: $100 * 2 occupants = $200

Unit 2: $100 * 1 occupant = $100

Unit 3: $100 * 3 occupants = $300

Unit 4: $100 * 2 occupants = $200

Unit 5: $100 * 2 occupants = $200

So, each unit's utility cost is determined by the number of occupants in that unit.

This is a simple example. In reality, RUBS allocation formulas can be more complex and may take into account multiple factors, depending on the specifics of the property and local regulations.

What is RUBS in a Multifamily Income Statement?

In the context of a multifamily income statement, RUBS refers to the Ratio Utility Billing System income. This is the income a landlord or property manager receives from tenants to cover utility costs as part of a RUBS program.

RUBS income (Ratio Utility Billing System income) should be included on a multifamily income statement. In accounting terms, RUBS income is an inflow of funds to the property owner and should be accounted for as part of the property's total income.

In an income statement, RUBS income is typically categorized under the "Other Income" section, distinct from standard rental income. This separate categorization helps in distinguishing regular rental income from other types of income, providing a clearer picture of where revenues are coming from and how utility costs are impacting the property's financials.

However, it's also important to note that while RUBS income can help offset utility costs, there may be associated administrative costs, such as billing and calculation services, which should be reflected in the "Operating Expenses" section of the income statement.

Where does RUBS Income Show Up on an Income Statement? 

RUBS Income would show up in the income section of the income statement, separate from rental income, but RUBS income would still be considered part of the property’s gross potential income.  You can see an example of RUBS Income on the income statement from our Multifamily Pro Forma Template. 

We added this to our pro forma income statement, by adding RUBS per month per unit type on the input revenue assumptions tab as seen below:

How Could a Ratio Utility Billing System Increase NOI?

The Ratio Utility Billing System (RUBS) can potentially increase NOI by shifting some or all of the utility costs from the property owner to the tenants. Here's how it works:

Reduced Operating Expenses: In a typical rental property operation without RUBS, utility costs are often a significant part of the operating expenses, which are paid by the property owner. By implementing RUBS, these costs are passed on to the tenants, thus reducing the total operating expenses for the property owner.

Increased Income: When property owners implement RUBS, they charge tenants for their share of the utilities. This cost recovery becomes a source of income (RUBS income), which adds to the property's total revenue.

So, if implemented and managed effectively, RUBS can increase NOI by reducing operating expenses and adding another income stream.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

Other Stories to Check out

How to Finance a Small Business Acquisition

In this article we are going to walk through how to finance a small business acquisition and answer some key questions related to financing options.

How to Acquire a Business in 11 Steps

Many people don't realize that acquiring a business can be a great way to become a business owner if they prefer not to start one from scratch. But the acquisition process can be a little intimidating so here is a guide helping you through it!

How to Buy a Business with No Money Down

Learn the rare scenarios enabling the purchase of a business with no money down and delve into the complexities of selling via seller notes, highlighting the balance of expanded opportunities and inherent risks in these unique financial transactions.

Have some questions?
Let us know and we'll be in touch.

FOLLOW
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
?