If you own several properties, it’s crucial to understand your overall costs for property maintenance. When you have a good estimation of total maintenance costs, it allows you to prepare your budget more wisely. However, how can you know what costs you may encounter for property maintenance? Let’s take a look at a few different formulas Baltimore property management suggests that will enable you to know the overall costs.
The 1 Percent Rule
This rule is helpful if you are considering investing in a piece of property and want to know if it is profitable to do so. When investing in a new property, you want to ensure that the rental income is greater than the expense, so you can make a profit. The 1 percent rule involves taking the price of the property plus any necessary repairs and multiplying it by 1 percent. The amount you get is the absolute most you would want to pay on a monthly mortgage payment. For example, if you were looking at a property that was valued at $300,000, you get $3,000 when you multiply by 1 percent. Your mortgage amount should not be any more than $3,000, and it’s best if it’s less.
The 50 Percent Rule
The 50 percent rule is another method a property investor can use to help ensure an investment's profitability. This rule works by subtracting 50 percent of a property's monthly rental income for expenses and maintenance when calculating its potential profits. For example, if a property could yield $1500 a month in rent, you would need to designate $750 for expenses and not consider that when considering its profitability. Of course, if you don’t use all 50 percent each month on expenses, you will be ahead even more.
The 5x Rule
Sometimes it’s helpful to look at the big picture and how things will be for the whole year. This is where the 5x rule comes into play. This rule looks at potential annual maintenance costs. It states that your average maintenance costs will be about 1.5 percent of the monthly rental income. For example, if your property brings in $1,000 a month, you can count on $1,500 a year in repairs. You could then take that amount and divide it by 12 to understand the monthly cost. When figuring out the monthly amount for the earlier example, it would be $125.
The Square Foot Formula
When considering the square foot formula, you will need to know how many square feet are in the property. Once that is calculated, the anticipated maintenance costs will be about $1 per square foot per year. For example, if the home is 1800 square feet, then the annual costs would be approximately $1,800. To figure out the monthly cost, you can divide that by 12 to get $150 a month.
Compare the Rules
Let’s take a look at how these different rules match up with one another. Remember, these are just to give you a ballpark figure to help you determine how profitable an investment might be. The 1 percent rule is the only one that is slightly different because it looks at how much you should aim for on the mortgage versus how much your monthly maintenance costs might be. So, we’ll look at the latter three when comparing how they line up.
For a rental that brings in $1,500 and is 2,000 square feet, the monthly costs would be estimated at:
- 50 percent rule — $750 a month
- 5X rule — $187.50 a month
- Square foot rule — $166.67
As you can see, the 50 percent rule does estimate a much higher amount, but this rule does take into account more than just repairs or maintenance. It includes things like taxes and Baltimore property management costs. Also, remember that estimating higher is better than underestimating and falling short. If this occurs, you won’t make the profits you want. However, if you overestimate, you’ll just have extra money for future investments.
A Property Management Company Can Handle Next Steps
With all involved in managing multiple properties, you can best maximize your profits by hiring a Baltimore property management company. At RentWell, we will assist you in keeping maintenance costs down. Whether you own one or ten properties, we can provide you with flat-rate pricing to simplify and reduce your costs. When you know in advance the exact amount you have to pay for your expenses, it frees you up to invest wisely.
Rentwell has come up with a Guide on Getting the Best Protection for Your Property to help you with maintaining your investment property. Download it now for free! Or you can also get in touch with us today for a consultation.
