Many property owners and real estate investors purchase a rental property with the wonderful idea that they will just collect the rent each month, and put it in their pocket. When it comes to owning and maintaining a rental property, you can count on having unexpected maintenance and repairs. Of course, it is impossible to predict exactly how much you will need to budget for maintenance but it helps to have an average number.
First, there are a few factors to consider before calculating a budget.
Age. A home built within the last 5 to10 years will need very little maintenance compared to older houses. Once the house turns 20 or 30, there is a large chance that major repairs and replacements, such as the roof, will need to be done.
Weather. Freezing temperatures and heavy snowfalls tend to affect the costs of maintenance significantly. Additionally, rainpours and other extreme weather can cause the house even more damage.
Condition. Some homes can be very old and still in great condition, thanks to the good upkeep of the previous owners while others can be neglected and in need of some work. Obviously, less neglected homes will need less maintenance and upgrades done. The condition of the homes tends to fall hand in hand with its age, older homes have had more opportunities to be neglected.
Location. Homes that are at the bottom of a hill or the end of a cliff may have increased maintenance costs because of their risk of flooding or other environmental stress.
After reviewing these potential factors, it’s time to begin calculating your yearly budget. A popular rule of thumb is to set aside 1% of the purchase price each year. So if the home cost $300,000, you should plan to set aside $3,000 a year minimum for maintenance. Depending on your home and the market timing of your purchase you may need to adjust this number up to 3%. This rule is widely used because it incorporates the for cost of labor and materials in your particular geographic location.
After calculating the one percent, it’s important to look back on the four factors previously mentioned. These will help you fine tune your budget based on the particular home you own. For each factor that you believe will increase the maintenance price, add 10%. Going by the example, if your $300,000 home is an older home located in an area that has extreme weather, you will need to add an additional 20% to your budget. The new budget is going to be (300,000)(.01)(1.2) = $3,600 per year or $300 per month.
Although the 1% rule is the most popular, there are other ways you are able to estimate the costs of maintenance. Here are a few others you can try out:
The total operating costs (which includes repairs, maintenance, taxes, insurance, administrative, legal, etc) will equal half of your rental property income. So, using the average rental rate in the US, $1,200/mo, you should expect to save $600 per month in order to keep the property up and running. Keep in mind that this estimate is not only maintenance costs but also includes many other costs associated with owning a property.
Many believe that the more square feet you’re managing, the more you’ll need to spend. This rule states that you should budget $1 per square foot per year for maintenance and repair costs. If you own a 2,000-square-foot home, for example, budget $2,000 a year for maintenance and repairs.
According to this rule, maintenance costs will average 1.5 times the monthly rental rate. So, if your home rents for $1,200, then you should anticipate spending approximately $1,800 throughout the lease period in repairs. Those with older homes tend to use this cost method.
While it’s nice to have a rough guess on how much money you should plan on spending on maintaining your rental property, there are just too many variables to accurately estimate. So use whatever formula you prefer to predict your cost, but keep in mind these two estimates from Real Property Management Solutions:
76% of yearly rental property maintenance and repair costs will be higher than you’ll expect.
99% of rental property repair and maintenance expenses will be higher than you’ll want.
In addition to these estimates, it’s important to realize that bigger projects are not accounted for in the average budget. If you know there are large maintenance projects coming within the year, make sure to add these into your budget. For example, you know your house will need a roof replacement in two years, begin saving a little each month until the roof needs to be replaced. If the roof is $5,000, put aside $208 each month ($5,000 divided by 24 months).
Maintenance varies heavily between each property. These budget calculators can help guide you to find a relative amount of money to save but you can never account for accidents that may happen along the way. Investing enough money in maintenance is incredibly important for the long run and keeping your property value intact.
Keepe is an on-demand maintenance network for property owners and managers. If we can help take care of maintenance issues - big or small - at your property, submit a maintenance request on Keepe today and we will take care of it for you.