Cost of repairs and maintenance for a rental property? PART 2 of 2
Mendell Gosnell - Monday, July 13, 2015
In the first part of the series we covered just a few factors to consider when owning property and determining what to expect in regards to cost. In this last part of the series we will give you solutions to the question “How much should I expect or save for maintenance and upkeep for my property?”
What should I save? There are two popular rules of thumb when determining how much to save in regards to the cost of homeownership. We will use these age old estimates as a guideline in making application to the cost of a rental property. In order to keep it simple we will focus on a typical rental home.
1% Rule – this common rule of thumb, suggests that you save 1% of the purchase price of your home per year. For instance, if your home was purchased for $250,000, that means you should save $2,500 per year for maintenance. This doesn’t necessarily imply you will use that every year, as some years you may not use much at all, while other years may require more money, but overall this is a great rule to use when determining how much to save for cost of homeownership or in this case, for your rental home.
Sq/ft Rule – this rule is also helpful in determining the cost of homeownership. The rule states that you should save $1 for every sq/ft of the property per year. For example, if you own a home that is 1,800 sq/ft, you should save $1,800 a year for estimated maintenance costs.
Of course these rules have a lot of conditions and qualifiers attached to them such as the age of the property, location of property, etc… However, the bottom line is that you will need to plan for and expect to have maintenance and repair costs with your rental property. Proper upkeep of your rental property will ensure happy tenants that rent longer and a property that increases in value over time. It can be expensive, but the rewards far exceed the costs. Someone is paying off your loan (assuming it is financed) and you get to take the interest deduction. You get to depreciate the asset. You get to control the asset, make changes you see fit to make and collect cash flow that is taxed at a lower rate than earned income. Now that we got a glimpse of what to expect as investment property owners, we can utilize these tools to better prepare ourselves for costs and expenditures. We hope this was helpful and practical in determining the cost of maintaining a rental property. Happy investing! -Jesse Barnes Business Development/Marketing Manager