Property maintenance is one of the most important expenses for landlords and real estate investors. It’s crucial to budget for this expense in order to avoid financial surprises down the line. This is especially important for new landlords who may not be aware of all the routine and unexpected expenses that come with owning a rental property. The following is a guide to help landlords create an accurate rental property budget.
Estimating Expenses for a Rental Property
It’s essential to estimate property maintenance costs to determine the viability of the investment. When preparing a property maintenance budget, it’s important to plan for emergencies and save a little money along the way. There are several ways to estimate expenses, including using an online ROI rental property calculator or an Excel spreadsheet. Here are some steps to follow when estimating expenses:
Connect with Local Industry Experts
Realtors and property management companies are great resource for advice and information on common challenges that landlords face. Cultivating a relationship with a property management firm from the outset can help you find answers to your questions and suitable representation for your rental property.
Get in touch with utility firms
Utility costs are a significant monthly expense for both residential and commercial properties. Request billing information from local utility companies for the past year to calculate expenses.
Establish connections with reliable contractors
Having a list of trusted contractors will allow you to get emergency repairs completed quickly. These relationships can also provide industry insight when estimating potential replacement or upkeep costs. Building a relationship with contractors can also help you negotiate better pricing on maintenance and repair services.
Explore various methods for estimating costs
There are several rules and formulas that landlords can use to allocate funds for annual upkeep and other expenses. These methods include the 50% rule, the 1% maintenance rule, the square footage formula, and the 5X rule. The 50% rule suggests that landlords should estimate expenses to be 50% of their rental income. The 1% maintenance rule recommends that landlords set aside 1% of their property’s value for annual maintenance. The square footage formula involves estimating maintenance costs based on the square footage of the property, while the 5X rule suggests that landlords should set aside five times the monthly rental income for maintenance and repairs.
Types of Rental Property Maintenance Expenses
Budgeting for rental property expenses requires the ability to anticipate various maintenance needs. Here are some of the different categories of fixed or variable maintenance expenses that landlords can expect to pay for:
Monthly regular maintenance
These expenses include monthly costs associated with maintaining the exterior curb appeal and any common interior areas of the property. Landscaping, routine exterior and interior cleaning, and trash removal are examples of regular monthly maintenance expenses.
This category includes costs associated with fixing unexpected damage to the property, such as broken windows, leaky faucets, and damaged flooring.
Upgrades and improvements
This category includes expenses associated with improving the property to increase its value, such as updating appliances, repainting, and installing new flooring.
Regular Seasonal Maintenance
This category includes expenses associated with seasonal tasks, such as preparing the property for winter, cleaning gutters, and maintaining air conditioning and heating systems.
This category includes expenses associated with maintaining and repairing appliances and other equipment, such as refrigerators, washers and dryers, and HVAC systems.
This category includes expenses associated with unexpected emergencies, such as floods, fires, and natural disasters.
Budgeting for Rental Property Maintenance
Now that you’ve estimated expenses and identified different types of maintenance expenses, it’s time to create a budget. Here are some tips for budgeting for rental property maintenance:
Allocate Funds for Emergency Expenses
Always set aside funds for unexpected emergencies, such as natural disasters or fires. It’s recommended to have at least six months of mortgage payments set aside.
Set a Percentage of Monthly Rent for Regular Maintenance
Allocate around 1% of the property’s value for regular maintenance expenses. For example, if the property is worth $200,000, you should budget around $2,000 per year or $166 per month.
Budget for Upgrades and Improvements
Upgrade and improve the property to maintain its value and keep tenants satisfied. It’s recommended to allocate around 10% of the property’s annual rental income for upgrades and improvements. This budget can cover updating appliances, replacing old flooring, and repainting the interior and exterior of the property.
Review and Adjust Your Budget Regularly
Review your budget regularly and make adjustments as necessary to accommodate any changes in expenses or rental income. If your expenses are higher than expected, you may need to reduce costs in other areas or increase the rent to cover the additional expenses.
Consider Hiring a Property Management Company
Managing rental properties can be time-consuming and stressful, especially for new landlords. Consider hiring a property management company to handle routine maintenance, emergency repairs, tenant screening, and rent collection. While this will come at an additional cost, it can free up your time and ensure that your property is well-maintained and profitable.
In conclusion, budgeting for rental property maintenance is essential for landlords and real estate investors to ensure the long-term success of their investments. By estimating expenses, identifying different types of maintenance expenses, and creating a budget, landlords can avoid financial surprises and keep their properties in good condition. Don’t forget to review and adjust your budget regularly, set aside funds for emergencies, and consider hiring a property management company to help with day-to-day operations. With these tips in mind, landlords can achieve financial stability and success in the rental property market.