- Remember that tenant turnover costs money, and you need to budget for this process.
- We recommend that landlords keep 8.3% of their annual income for repairs.
- Keep a reserve amount of money for big ticket items.
How Much Should You be Budgeting for Repairs?
To put into perspective just how challenging this can be, we looked to one of the largest publicly traded single-family investors, American Homes 4 Rent. As a large institutional investor, AH4R has a team of analysts to determine an amount for budgeted repairs on their vast portfolio of rental properties. Surprisingly, they underestimated their budgeted amount by 42%! This is no small error. If even professional analysts can't accurately prepare for repairs, how can you expect to plan ahead?
While there are many factors that go into deciding on the amount you should be saving and budgeting for rental property repairs, we’ve come up with a few useful guidelines to arm landlords like you with the knowledge needed to stay profitable.
First, don’t forget that turnover of tenants costs money! Turnover is potentially one of the largest expenses you can incur as a landlord, so it's encouraged that you prepare for these costs accordingly when your tenant vacates your property.
Second, remember to overestimate your budget for repairs and maintenance. Underestimating these potential costs can result in negative cash flow. We recommend budgeting one month's worth of income for repairs and maintenance. On average, over time, landlords on average spend this amount on repairs / year. While this is a solid baseline, you should adjust appropriately based on your property's condition. A new home would probably require fewer repairs, whereas an older home may require more. When we look at this ratio as a percentage of your income, 8.3% of your annualized income should be budgeted for maintenance expenditures. When we look back to the AH4R example, their team initially budgeted 6.1% for estimated repair costs, but their actual repair amount came to 8.5% - just over the 8.3% suggested allocation.
Lastly, we recommend keeping a reserve for large ticket items. Things are bound to break in your property, and you will be responsible for their replacement or repair. From experience, we recommend keeping three times your monthly rent amount in this reserve.
If you are a rental property investor and have questions about budgeting for repairs or anything else related to the management of your investment property, give our team a call. We are happy to serve as a resource for you. 303-255-1990.