Novice landlords often absorb the myth that any income earned from your rental properties is profit. If you’re realistic, though, there’s a lot more to the picture. Budgeting is a big part of it.
The income you earn from each unit may partly qualify as profit, but a good percentage also goes back into the property; at least, it certainly should. For starters, you have predictable expenses such as taxes, mortgage payments, insurance, and utilities.
But there’s also a scary category called “unexpected expenses” that you’ll plan for in advance if you’re smart. Budgeting maintenance will be a big chunk of that unexpected expenses category, and experienced landlords recognize that they have to earmark a portion of their income for upcoming repairs and improvements.
If you don’t have that extra savings, you’ll be in trouble the minute something breaks down. Wise landlords develop a strong budget for the maintenance needs of all their rental properties. If you want to be one of those, consider the following strategies.
It’s not possible to be accurately budgeting how much you’ll spend on maintenance in a given year. But many landlords use one of several useful formulas to arrive at a ballpark figure. Here are three formulas property owners commonly employ.
Many landlords base the amount to be spent on a property on the total square footage. Typically, the owner will designate $1 per square foot to yearly maintenance costs. This means that a 2,000 square foot rental will require $2,000 a year budgeted for maintenance.
This guideline encourages you to budget one percent of the property’s total value for maintenance every year. In simple terms, that means if you own a property that’s worth $100,000, you can plan $1,000 yearly for maintenance budgeting. The actual dollar amount spent might be higher or lower, but this is a useful estimate in a pinch.
Some property owners also base their yearly savings requirements on a percentage of one month’s operating expenses. Typically, the cost of operating a rental is between 35 and 80 percent of your rental income.
You can be budgeting such expenses based on one month of tenant occupancy. Let’s say you collect $1,200 in rent each month and your expenses are $600. That means you have an operating expense percentage of 50 percent.
Not all of that amount will be spent on maintenance, but you can assume about 25 percent of your monthly expenses are maintenance. Take that cost (in this case, $200) and multiply it by 12 to get the annual cost. In this case, you should be saving $2,400 a year for maintenance costs.
Other factors will influence these formulas. For example, a home built in 1900 will probably require more maintenance than one that went up in 2010. You might also have a property that attracts a higher grade of tenants, so it may require greater maintenance to keep them satisfied and willing to stay.
In those cases, you might be budgeting 2 percent of the home’s value or $2 per square foot for a home you think might require more maintenance. Neither formula is perfect, but they offer a start, and as you gain more experience, you can easily alter your formulas to arrive at more accurate estimates of yearly maintenance costs.
These formulas work well for some, but they entail more guesswork than some landlords are comfortable with. If you want a more technical discussion of maintenance, factor in the variety of typical expenses and factors that are likely to affect yearly costs.
You can create your own formula by breaking down your expected costs for each facet of the property. This is a time-consuming process, obviously, and it still involves a lot of guesswork, but it will enable you to arrive at a more accurate figure for yearly maintenance costs.
Here are some details you’ll probably want to consider for this formula:
Sometimes, you’ll have fixed maintenance costs, such as a property management fee, yearly fireplace inspection, homeowners association fees, and so on. Start by identifying all the fixed expenses before moving on.
Each residence will require routine maintenance every year. This might include exterior cleaning, clearing out the gutters, polishing blinds, a professional cleaning after a tenant leaves, grass cutting, landscaping expenses, and similar costs.
It will also include seasonal maintenance such as pruning trees and aerating grass. List all the maintenance you’d like to apply to your property routinely and add that to your calculations.
You can’t assume your tenants will perform regular maintenance on their appliances, even if you ask them to clean out the dryer lint traps and regularly scrub their oven interiors. Many landlords schedule regular appliance maintenance to make sure it gets done.
This may well include routine cleanings and inspections of HVAC systems, refrigerators, washers and dryers, stoves/ovens, sump pumps, etc. Assess the costs of regular cleaning and inspection for your big-ticket appliances and add that to your yearly estimation.
At some point, you’ll have to replace elements on your property, such as the appliances, flooring, roof, and paint. Try to calculate the age and wear on each of these features and estimate the potential cost of replacement in the coming year.
Broken air conditioning in 100-degree weather, a leaking water heater, and other emergency maintenance issues will probably surface, no matter how prepared you might be for such eventualities. Routine maintenance will help to prevent some of them, but it’s also good to be prepared for the unexpected.
A tenant might destroy your rental property, whether intentionally or by accident. The security deposit can cover some of it, but it might not cover all. You probably have insurance to cover major destruction, but if the damage is small, you might not wish to file a claim and risk making your rates go up. Having a contingency fund in place for potential damage can be far more preferable.
The odds are a tenant or two will move out this year, and you’ll need a professional cleaning before the next tenant moves in. The security deposit should cover cleaning costs, but it’s not always enough, depending on the situation. Having a little cash in your pocket for regular cleanings will save you time, bigger costs, and hassle.
Obviously, it’s never simple to calculate maintenance for a rental property. There might be other factors you’ll want to consider, such as:
Although you’ll have insurance to cover some major property damage, consider each of the above factors and how it could affect your budgeting. You might end up having to adjust your original formula substantially.
By now, the task may seem overwhelming, but after a year or two of being a landlord, you’ll likely get the hang of budgeting for routine maintenance. You’ll never fully get a handle on surprise maintenance and emergency situations, however.
So that could be a great reason to hire the property management services of Green Residential. We offer maintenance and repair services in the greater Houston metropolitan region. Our services come at a flat rate, so landlords don’t have to guess about the possible upcoming maintenance costs.
If you’re interested in handing over the maintenance headaches to a highly professional group in the Houston area, contact Green Residential today for your free consultation!
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