Knowing how much it will cost to maintain your rental property is an indispensable part of making money off your rental property. After all, if it costs more money than you make to own a rental property, then you’re destined to fail.
And, too often, negative income flow is the reason that people sell their rental properties!
What is the Industry Standard?
There are many methods of estimating how much a property owner should set aside every year to cover maintenance. However, when you actually sit down to make a budget, you’ll know roughly how much you’ll need to cover all the fees, repairs, replacements, and other forms of maintenance associated with rental property ownership.
What Are Common Fixed Rental Property Expenses?
These are portions of your operating budget that you’ll have to pay irrespective of what happens to your home and whether or not you have a tenant. Since these are regular fees, it’ll be easier to account for them when you make your budget.
1. Property Taxes
Contact the county assessor to get the exact figure for current property taxes. And make sure you know how much you’ll be paying in property taxes after you close escrow. It could be very different from what the seller pays.
Tenants usually pay for electricity. However, multifamily properties may require additional payments because of the electricity needed for various parts of the property. Like lighting for parking, for example.
3. Pest Control
Pest control is largely preventative. It includes spraying pesticides around your home. In the event of an infestation, the landlord must intervene immediately to protect the tenant’s comfort and safety.
4. Waste Management
It’s the landlord’s responsibility to maintain cleanliness by providing trash cans and coordinating regular collection. Additionally, elevators and other shared-use areas are the landlord’s responsibility to keep clean.
If you contact your insurance agent and give them your property specifics, you’ll get an exact estimate for the type of coverage that you need. Based on your geography, you may need particular coverage. Like earthquakes, floods, etc.
6. HOA Fees
Homeowners Association (HOA) is something you should be able to find on any for-sale listing or by calling the property manager. You’ll want to know the current fees, when the fees increase, how often the fees increase, and if there’s a special assessment on the horizon.
7. Property Management Fees
If you’re going to hire a property manager then you’re going to want to shop around for the best price. Expect to pay six to eight percent of the rent toward property management. That figure may not including re-leasing costs, which could be as high as 50 to 100% of a full month’s rent in addition to the monthly fee.
What Are Common Variable Rental Property Expenses?
These are portions of your operating budget that vary based on your geographic specifics, or occur with less regularity, like seasonal concerns and repairs.
Your property won’t be rented all the time. Luckily, you can factor these periods into your budget. The vacancy rate is calculated using the percentage of the income that’s lost due to the vacancy. So, if you expect your property to have a vacancy of one month once per year, then that was 1/12th of your income or 8.3%.
10. Routine Maintenance
These are the expenses associated with maintaining curb appeal and common areas if need be. This includes landscaping, cleaning both the inside and outside, collecting garbage and recycling. Since this maintenance is routine, it’s the easier one to budget for and tends to involve a fixed cost that you pay each month.
11. Seasonal Maintenance
Depending on the region where your property is, seasonal maintenance may include pruning trees, snow removal, and gutter cleaning. It’s also important to rake leaves and mow the lawn regularly since the alternative, in addition to being unseemly, breeds conditions for ticks, fleas, rodents, etc.
12. Appliance Maintenance
It’s in the landlord’s best interest to maintain appliances themselves so that their investment is properly taken care of. This means routinely servings HVAC systems, sump pumps, refrigerators, stoves, washers, and dryers.
13. Emergency Maintenance
If you’re prepared for the unexpected you won’t be caught off guard when the inevitable emergency occurs. A heater dying in the middle below–freezing temperatures, and AC not working during a heatwave, or pipes bursting in the middle of the night due to cold winter temperatures. These events demand immediate attention to prevent further damage to the property and to ensure the tenant’s comfort and safety. So, always have plans made in advance for the most common types of emergencies.
14. Painting and Flooring
Painting is a great way to keep your property looking like new in-between tenants. Painting may also be the only option if an occupant left the walls particularly scuffed or marked up. In the instance of the latter, the landlord is justified in taking a percentage of the security deposit to cover the cost of repainting. However, in the case of a long term tenant, the painting would just fall under regular wear and tear and, as a result, ought to be a part of the land lord’s operating budget.
Similarly, flooring may also need to be replaced between tenants. Carpet suffers the most from normal wear and tear. Regular carpet maintenance may include yearly professional cleaning. You may want to consider a flooring option that requires less care, like laminate or wood.
CapEx is the term for the money you use to upgrade or repair your investment. It’s used to refer to “big-ticket” items like your roof, water heater, appliances, etc. Budgeting for CapEx is actually easier than you might expect because the funds are being set aside for inevitable expenses rather than for surprise or inconsistent expenses. You know items will have to be replaced eventually, you know the lifetime of these items, and you know their cost. By replacing in a timely manner, you avoid the risk of emergencies or incurring further property damage due to negligence.
Will DYIing Repairs Always Save Money?
A DIY approach will definitely save you money so long as you’re handy enough to perform those tasks. But you have to ask yourself honestly, “Are you handy enough?” If you’re not, you’ll end up doing more harm than good.
In addition to being capable of doing the work, there’s the question of whether or not it’s worth your time to do the work. It might just make more sense to hire someone else to do it for you. What good is your extra income if its cost is your quality of life. And, remember, it’s as important to do right by your tenant as it is to do right by yourself. If you doing the job means making your tenant wait then it’s not worth it.
Are Tenants Responsible for Maintenance & Repairs?
The landlord should always handle the repairs. Even if the tenant breaks something, it should be the landlord who arranges for the repairs using funds from either the security deposit or money that’s provided by the tenant.
It’s also better for the landlord to handle regular maintenance. Your tenants may not even remember to do small tasks like replacing smoke detector batteries or furnace filters, so if you’re the one handling those tasks you know they’ll get done. Or, you can simply provide such items to serve as reminders to install them. Landscaping is also your responsibility as the landlord.
What Do Security Deposits Cover?
The security deposit covers damage done to the property by the tenant. It also protects the landlord in the event that your tenant skips out on rent, or moves before a replacement is found. Additionally, a security deposit is one more way to test your tenant’s ability to pay their rent since being able to get together one month’s rent plus a security deposit before moving in is a positive sign.
Should I Replace or Repair?
There’s no one answer to this question. Instead, the best approach is to take things on a case by case basis. If we’re talking about an appliance, for example, consider its age, condition, estimated lifespan, previous fixes, and safety concerns. One rule of thumb is if the appliance is more than half the age of its estimated lifetime, and repairing it will cost more than 50% of replacing it, then you should replace rather than repair.
Repairs, however, are tax-deductible, which is something to keep in mind (and to track closely). Also, don’t forget the toll the repair will take on the tenant. If it’s too disruptive to repair, it would take too long, or may require further repair sooner rather than later, then a replacement might be the best option.
How do I Estimate Rental Property Maintenance Costs?
There are several techniques that people use to create an estimate of how much property maintenance may run. These are, however, only estimates. It’s important to remember that each property is different, so there’s no one size fits all approach.
This rule stipulates that 50% of your rental property income should be set aside for maintenance, taxes, insurance, etc. So, if you earn $1,200 a month, then $600 should go toward operating costs.
The 1% rule stipulates that 1% of how much your home is worth at the time of purchase is how much you set aside yearly for maintenance. If your home was $300,000, for example, then set aside $3,000 for maintenance. The underlying value of your home and the cost of repairs are independent variables, meaning that they’re connected by virtue of both being affected by the cost of labor and materials in your region. So, if you bought your home at the height of a bubble the expense of maintenance won’t go up. Nor will your maintenance budget be impacted if your home was purchased at a significant discount at the bottom of a housing market crash.
Square Footage Formula
This method of calculation entails assigning a value of $1 to every square foot of your property and setting that much aside for maintenance. So, if your property is 2,200 square feet then you’d expect to spend $2,200 on maintenance.
This rule dictates that maintenance will cost 1.5 times the monthly rent. So, if rent is $1,200, then you should expect to spend roughly $1,800 on maintenance a year.
There’s a lot of ways to estimate how much you’re going to spend on operation costs. It’s when you get down into the nitty-gritty and actually create a budget, however, that you’ll really know how much money to invest in your rental property. You can plan for emergencies, replacements, etc and, as a result, be a far more resilient investor.
That’s a good place to be because operating a rental property can be a great way to generate regular income while your initial investment appreciates in value. And, best of all, real estate is not necessarily contingent upon other commodities or the stock market, so even if various sectors of the economy suffer you can still come up ahead.
You may even do better than many because when the going gets tough the tough start renting!