The last thing you want to hear when you own an investment home is that something inside of it needs repaired. The mere thought of having to fix or replace something can send panic and shock into your otherwise happy life. The reality is that repairs and maintenance are just as big of a part of owning a property as cashing rent checks. While you can't plan in advance for a good time for problems to happen, you can estimate how much rental income to holdback for maintenance and repairs. This will give you an idea of how much should be subtracted from your monthly rent collection to hold in a reserve account for when unforeseen problems pop up.
How to Estimate the Cost of Mainenance and Repairs
There are two ways that you can obtain a good price estimate. If you are managing your own property, making a few phone calls to local contractors will give you a very close ballpark figure. There are three areas that are most common for repairs and will serve as the basis for your estimates. These are roofing, plumbing and HVAC. Calling two to three experts in each area and averaging the prices together will give you a very good estimate on how much a typical repair or replacement will cost. If you have a property management company, these experts almost always know the current rates that contractors charge you to provide repair or replacement services.
The average percentage of rental income to set aside each year for repairs is between 1 percent and 3 percent of the property value. The income that you set aside can be used to your advantage. It can be put into short-term money market accounts or other liquid securities. As an example, if you own a $100,000 property and you save $10,000 each year you could receive a return on this reserve money. You could get lucky and not have any repairs for a year or two. The substantial savings that you have earned can be used to invest into your business.
Keep in mind that not every repair or replacement that must be done to your property happens with an active lease. If you evict a tenant or one leaves, the property might need repair work completed to make it ready for the market again. Being a smart landlord can help to ensure that you are not financially surprised when presented with a sudden problem. The expense of unexpected repairs and problems can easily chip away your profits each year from your investment property. Holding your reserve and growing this reserve money helps a lot.
Planning for Additional Expenses
Things like changing insurance companies could require you to get a home inspection. It could be hundreds of dollars for a home inspection plus the cost of a new insurance premium. Quarterly expenses for pest control inspections and prevention is an added expense that is totally separate from repairs. Playing it safe and planning for how much rental income to holdback for maintenance and repairs will let you enjoy more of your investment property cash flow.