Landlords would ideally have to direct a portion of rental income towards improvements and maintenance. This basically serves to keep the rental property in prime shape and retains tenants’ satisfaction.
To keep up with regular maintenance expenses, an excellent method is to have a budget which is a vital part of real estate bookkeeping.
Importance of a Property Maintenance Budget
A realistic maintenance budget typically helps you avoid losing money on your rental properties, and guarantees a safe living space for your tenants/residents.
In addition to these, here are three main reasons why a property maintenance budget is important:
Keeps Your Finances In Order
Allocating funds for the maintenance of rental properties can be quite difficult. This is mainly because of the inherent variability in expenditure.
For instance, maintenance costs could be $500 one month and go down to $0 the following month.
However, the expenses tend to average out over a time period. Therefore, estimating a set price per month can help you plan ahead and keep your real estate finance in check.
Budgeting Helps Manage Unforeseen Circumstances
Unforeseen circumstances, otherwise known as emergency repairs are not an uncommon occurrence in rental property management.
Some of these repairs usually require immediate attention especially when they disrupt the everyday lifestyle of tenants.
Having a monthly budget with money set aside helps to immediately attend to these unforeseen circumstances without any hassle.
Repairs are a Legal Requirement
Even if you do not want to make repairs, you have to. This is because The Landlord-Tenant Law stipulates that landlords must keep the property in a livable condition for residents.
Basically, this involves activities such as:
- Replacing roofs
- Fixing broken appliances
- Managing pest invasions
- Damaged structural features repair
- Eradicating mold/toxins
Common Maintenance Expenses
Before drafting a maintenance budget, having a working knowledge of the basic expenses involved is essential. This applies even if you’re not a real estate accountant.
Generally, these are divided into the following major categories:
Routine maintenance refers to expenses that go into maintaining and boosting the property’s curb appeal.
This implies that it mainly focuses on the exterior and certain general areas of the interior (if necessary). Some common costs associated with this include:
- Routine exterior and interior cleaning
- Garbage disposal and recycling collection
Budgeting for monthly routine maintenance is generally straightforward since most of the costs are fixed or vary only slightly.
This refers to maintenance needs that come outside of routine periods. This would include occurrences like:
- A burst pipe
- A broken air conditioner
- A faulty heater
- Leaky faucets, amongst others
Emergency maintenance typically requires immediate attention to uphold your tenant’s right to a livable environment. In addition, it helps you avoid further damage to your property as well.
Routine maintenance generally helps to avoid most emergencies, however, unexpected events do occur on occasion.
This is dependent on the property type as well as the geographical location. Some seasonal maintenance activities include:
- Cleaning out gutters in the fall
- Clearing snow
- Tree pruning
These events are termed seasonal because they are mainly required at a particular time of the year.
Regular maintenance of appliances used by tenants is a great way to avoid emergencies and extend the lifespan of said appliances.
While tenants should typically saddle responsibilities like changing air filters or cleaning out the trap of the dryer, there is a significant possibility that they would not.
This is why maintaining big-ticket appliances such as refrigerators, HVAC systems, stoves, sump pumps, and washers and dryers helps keep things running, and importantly, helps you avoid losing money on replacements.
Budgeting for replacements involves estimating the lifespan of major structural features and appliances and planning ahead.
Flooring, appliances, roofs, paint, all eventually require replacing over the years. While these are major home maintenance costs, they serve to enhance the value of your property as well.
How to Draw Up a Maintenance Budget
Drawing up a maintenance budget follows several ways. Generally, three major rules of thumb guide this process in real estate finance and real estate bookkeeping, depending on property type:
This involves setting 50% or half of the monthly rental income aside to cover major expenses like taxes, insurance, as well as maintenance, repairs, and other costs that property owners incur.
Square Footage Formula
Another commonly used formula is calculating maintenance based on the home’s square footage. Using this formula involves summing up total square footage and then allocating $1 per square foot/annum.
This implies that for a 2,500-foot rental, your annual maintenance costs would sum up to around $2,500.
One Percent of Property Value Formula
This is a simple way to estimate maintenance costs. The rule states that one percent of property value should be budgeted as yearly maintenance cost.
Therefore, a $300,000 rental property would see an annual basic maintenance cost of $3,000. This method is great if you’re looking to quickly get a general estimate.
Factors To Consider When Drawing Up a Maintenance Budget
Estimating maintenance costs based on general calculations are a good way to start. However, to achieve a more precise estimate, any real estate accountant would recommend that certain factors that specifically affect maintenance requirements should be considered:
Type of Property
The property type plays a significant role in maintenance costs. For instance, a residential, single-family home would typically require higher maintenance costs relative to a home or condo that a Homeowner’s Association (HOA) takes care of exterior maintenance. Of course, you would have to pay HOA fees.
Age of the Property
The age of your property determines to a great extent, your annual maintenance costs. Basically, homes that are in the 10 to a 15-year old range or older usually require major upgrades. This could include a new roof, new siding, and even electrical wiring.
On the flip side, a relatively new property would have lower maintenance costs.
State of the Property
The state of the property basically refers to a general assessment of its condition. If a property has been properly maintained, it would require less in annual maintenance, renovations, and repairs, and vice versa.
This includes external factors such as harshness of the climate, risk of natural disasters such as floods, as well as others like a pest infestation.
A property maintenance budget is a necessary tool for any smart investor who intends to make maximum profits. This is because it presents you with a general idea of expenses you would incur per time, and equips you with the necessary knowledge to plan.