Maintenance expenses are dependent on a wide array of variables. There's no set number we can give you because every property is a little different.
Our team can create a budget for your specific property, and prepare you the right way for whatever maintenance issues may arise.
There are quite a few methods on how to budget for maintenance, so let's discuss a few;
The 1% rule:
This model says that maintenance expenses will be equal to 1% of the property's value. So for example, if your home is worth $100,000 then you should expect $1,000 dollars a year in maintenance. Other variations of this model suggest using 2% or even 3% of the property's value.
Square Footage Formula:
This formula suggests that you budget $1.00 per square foot of the home for maintenance So, let's say you have a 1,500 sq. ft. home, this would put you at $1,500 dollars a year for maintenance expenses.
The 5X Rule:
This rule states that you will spend approximately 1.5 times the monthly rent rate in maintenance. If you charge $1,500 for rent, you should budget around $2,250 for maintenance expenses every year.
For most homes that we manage, that are newer and considered to be in “good” to “very good” condition, we recommend budgeting 10% of gross yearly rent on maintenance. So if your property rents for $1,000 a month ($12,000 per year), you would need to plan for $1,200 in maintenance expenses annually, or $100 a month.
Of course, you probably won't see it happen at a perfect $100/month rate. Typically, you could go several months with no maintenance, then a $300 issue may happen. The seasonal changes in Ohio will cause more reported maintenance. After multiple years of owning and managing rental real estate, this is the method that we have come to use and feel is most accurate.
Turnover vs. Maintenance Costs
It's also important to keep in mind that turnover costs and maintenance costs are not the same thing. Turnover expenses are incurred between Tenants (while you're getting the property rent ready) while maintenance expenses are usually incurred while there is a Tenant occupying the home.
These expenses should be kept separate when creating your budget.
One rule of thumb is to allocate 10% of the total value of the lease for turnover cost at the end of the lease. So the longer the Tenant stays, the higher the typical turnover cost will be because of more “normal” wear and tear.
If a Tenant stays for 3 years, at $1000 month, then you should anticipate at least $3,600 in needed turnover work to recondition the home for re marketing. Of course, this can vary depending on the age of major components of the house. For example, carpet typically only lasts 7 years. So periodically, there will be additional items that will need to be replaced during the lifetime of your investment.
Caveats, caveats and more caveats
Again, we have to stress that all methods mentioned above are not 100% accurate. You have to take into consideration other things that could affect these numbers such as:
1) Age of the home - It's generally safe to say that the newer the home, the smaller the odds for things to break and go wrong. Vice versa, the older the home is, the more room there is for problems to arise.
Because of this, you'll need to budget accordingly. Using our method, for homes 10 years and younger, the 10% range is probably a good assessment. Homes 10-20 years old would probably be more in the range of 15% of your gross monthly rent, and homes 20 years and older would probably need closer to 20% budgeted for maintenance repairs.
2) Quality of the Home - Not only do you need to consider the age of the home, but the quality of it as well.
3) Size of Home - Larger homes have more square footage, more equipment, and typically more amenities that may need attention. Therefore, your average maintenance and turnover costs will be more for a 4 bedroom 4,000 sq ft house vs. a 2 bedroom 900 square foot house.
4) Cycle Nature of Maintenance - This is an age-old accepted concept, but you may not have thought about it in terms of budgeting for maintenance. It's generally known that single family homes are on 10-year cycles. Meaning, most major appliances, HVAC systems, roofs, etc., are only made to last around 10-20 years.
So, as your property ages, you'll likely conduct some replacement maintenance at these 10-year marks. These are usually big ticket items and can cost thousands of dollars. Don't get blindsided by these expenditures and keep this in mind when you're purchasing your investments.
Rental Property Maintenance Deductions
The cost for maintenance does have a couple perks.
You can, in fact, deduct most of your maintenance expenses from your taxes each year or include them in the depreciation.
There are two classifications of deductions - business expenses and capital expenditures.
These are usually smaller, less expensive repairs and maintenance such as fixing a toilet, replacing a dishwasher, or patching a hole in the roof. You can deduct business expenses from your taxes each year.
These are larger, more expensive repairs and maintenance that overall improves the home and adds life and value to the property. This would be things like replacing the entire roof, purchasing a new HVAC system, or landscaping the entire property.
Capital expenditures must be deducted proportionately over a long period of time. The IRS has specific rules and regulations for utilizing this method.
As you can see, there is a lot to think about when it comes to rental property maintenance. While there is no way to predict your yearly expenses, there are some tried and true ways you can plan and prepare for these costs.
We encourage you to do even more research so that you fully understand how to determine the best way to move forward for your unique situation.
If you have additional questions, give us a call or send an email today.