Knowing the maintenance cost of your rental property is an indispensable part of making money off your rental property. After all, if the maintenance expense is greater than the rental income generated by your rental property, then you're destined to fail. Negative income flow is a common reason that people sell their investment property.
What is the Industry Standard?
There are many methods of estimating how much a property owner should set aside to cover routine maintenance every year. When you sit down to make a budget, you'll know roughly how much you'll need to cover all the fees, rental property repair, replacements, preventative maintenance, etc., associated with rental property investment.
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 or 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
Consult 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.
2. Electricity
Tenants usually pay for electricity. However, multifamily properties may require higher maintenance costs because of the electricity needed for various parts of the property, such as lighting for parking.
3. Pest Control
Pest control is mainly preventative maintenance. 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 rental property owner's responsibility to keep clean. An injury caused by debris in common areas is a landlord liability.
5. Insurance
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. Purchasing the right insurance is critical.
6. HOA Fees
A Homeowners Association (HOA) fee 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, you will want to shop around for the best price. Expect to pay six to eight percent of the rent toward the property management fee. That figure may not include re-leasing costs following tenant turnover, which could be as high as 50 to 100% of an entire month's rent in addition to the monthly fee.
What Are Common Variable Rental Property Expenses?
These are portions of your operating budget based on your geographic specifics or occur with less regularity, like fall maintenance.
9. Vacancy
Your property won't be rented all the time. You can factor these periods into your budget. The vacancy rate is calculated using the percentage of your cash flow 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 easier to budget for because it's a fixed cost that you pay each month.
11. Seasonal Maintenance
Depending on the region where your property's located, 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. Keeping dry debris away from your home is also part of fire prevention.
12. Appliance Maintenance
It's in the landlord's best interest to maintain appliances themselves so that their investment is adequately taken care of. This means routinely servicing HVAC systems, sump pumps, refrigerators, stoves, washers, and dryers. In addition, upgrading appliances while you have tenants is a gesture that encourages lease renewal because new appliances are a strong motivator.
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 during below freezing temperatures, an AC not working when there's 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 ensure the tenant's comfort and safety. 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 fall under regular wear and tear and, as a result, ought to be a part of the landlord's budgeted operating expense.
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, which will speed up rental property turnover.
15. CapEx
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, and appliances. Budgeting for CapEx is easier than you might think because the funds are set aside for inevitable expenses rather than surprise or inconsistent expenses. You know items will have to be replaced eventually, you know the lifetime of those items, and you know their cost. By replacing promptly, you avoid the risk of emergencies or incurring further property damage due to negligence.
Will DIY-ing Repairs Always Save Money?
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A DIY approach will 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.
Responding to maintenance requests quickly is another way to encourage lease renewals. As is resolving the maintenance issue during a time of day that works for your tenant. That's easier to do for a dedicated full-service property management company than it is for someone who's making repairs on top of a job they already have.
In addition to being capable of doing the work, there's also the question of whether or not it's worth your time to do so. 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?
It's a bit of a rental property maintenance myth to save money if you take care of everything yourself. A property management fee can range between 6 to 12% of collected monthly rent. It's a flat fee, so it doesn't fluctuate from month to month unless there are extraordinary circumstances that deviate from regular monthly maintenance.
A maintenance fee is a small price to pay for peace of mind. You also save money because of economies of scale, which allows property management companies to leverage the size of their material and labor needs when it comes to negotiating costs. An individual cannot compete.
A property management company has more time to keep up with changes in property codes, saving you from potential financial penalties. Finally, a property management company knows enough about tax deductions to reduce the costs of your repairs.
Are Tenants Responsible for Rental Maintenance & Repairs?
The landlord or property manager should always handle the repairs. Even if the tenant breaks something, the landlord arranges for the repairs using funds from either the security deposit or money that the tenant provides.
It's also better for the landlord or property manager to handle regular maintenance rather than leave it to tenants. For example, 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 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 if your tenant skips out on rent or moves before a replacement is found. Additionally, a security deposit is an indispensable part of tenant screening their rent since getting 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, consider its age, condition, estimated lifespan, previous fixes, and safety concerns. One rule of thumb is that you should replace any appliance that's more than half its useful lifetime if it costs more than 50% the cost of a replacement to repair.
Repairs and replacements qualify for different tax deductions, 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, 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. In addition, it's important to remember that each property is different, so there's no one size fits all approach.
50% Rule
This rule stipulates that 50% of your rental property income should be set aside for yearly maintenance costs, taxes, insurance, etc. So, if you earn $1,200 a month, then $600 should go toward operating costs.
1% Rule
The 1% rule stipulates that 1% of how your home's property value at the time of purchase is how much you set aside yearly for rental property maintenance expenses. For example, if your home was $300,000, set aside $3,000 for annual maintenance costs.
The underlying value of your home and the cost of repairs have a strong relationship 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 calculation method 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.
5x Rule
This rule dictates that maintenance will cost 1.5 times the monthly rent. So, if rent is $1,200, you should expect to spend roughly $1,800 on maintenance a year.
Bottom Line on Rental Property Maintenance Costs
There are many ways to estimate how much you're going to spend on operation costs. It's when you get down into the nitty-gritty and create a budget, however, that you'll know how much money to invest in your rental property. Then, you can plan for emergencies, replacements, etc., and, as a result, be a far more resilient investor.
That's an excellent place to be because operating a rental property can be a great way to generate regular income while your initial investment appreciates. 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!