Published April 15, 2021. Updated February 16, 2023.
Whether you own one property or several rental 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 and resources more wisely to maximize ROI (return on investment). However, how can you know what costs you may encounter for property maintenance?
With our experience as property managers, we've seen a lot of rental property maintenance over the years. So today, we offer our expert insights into a few different formulas Baltimore property management suggests that will enable you to plan maintenance expenses for every property in your portfolio.
Why Each Property Needs a Custom Rental Property Maintenance Budget
Every rental property is unique, featuring its own set of amenities, age, and location, which inherently calls for a custom maintenance budget. Therefore, a one-size-fits-all approach to maintenance budgeting doesn't account for these variables, risking financial misjudgments.
Older properties may require more funds for frequent repairs, while newer ones might need less. The location in the Baltimore area also might influence maintenance costs.
That's why property managers recommend creating a budget specifically for each property in your portfolio. Custom budgets consider these factors, enabling more accurate allocations and financial planning.
This tailored approach ensures that you're neither overestimating nor underestimating costs, allowing for a more profitable and smooth-running rental operation.
What Are the Best Formulas to Estimate Maintenance Expenses?
When planning maintenance budgets, it's crucial to review your numbers yearly. As different factors impact the costs of labor, maintenance technicians or service providers, and materials (like HVAC filters), costs can change from year to year.
Rather than assume the budget you started with when you first purchased a property years ago is still good today, our experienced property management team recommends applying a few formulas to accurately forecast potential costs for maintaining your rental properties.
The 1 Percent Rule
This rule is helpful if you are considering investing in a property (or you're planning ongoing budgets for a rental) and want to know if it is profitable to do so.
When investing in a new property, the rental income must be greater than the purchase price so that you can make a profit. The 1 percent rule involves taking the price of the property plus any necessary repairs and multiplying it by one percent.
The amount you get is what you could estimate as the potential costs to set aside for the home's maintenance for the year.
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 maintenance budget for that property should be about $3,000 annually.
You can also continue applying this rule each year to update a property's budget based on the annual value of the home (rather than the initial purchase price) since the property is likely to increase in value over time.
The 50 Percent Rule
The 50 Percent Rule is another method a property investor can use to help estimate monthly expenses, including maintenance.
This rule works by subtracting 50 percent of a property's monthly rental income for expenses and maintenance. For example, if a property could yield $1,500 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 half of the monthly rent amount each month on expenses or property repairs, you can roll that amount forward to be prepared in case of a maintenance emergency.
The 5x Rule
Sometimes, looking at the big picture and how profit and expense could look for an entire year is helpful. 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 estimate $1,500 a year in repairs.
You could then divide that amount by 12 to budget or save the monthly cost of potential annual repairs. When figuring out the monthly amount for the earlier example, it would be $125.
The Square Foot Formula
When considering the Square Footage Formula, you will need to know how many square feet are in the property. Once that is calculated, this formula suggests the anticipated maintenance costs for the property will be about $1 per square foot per year.
For example, if the home is 1,800 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 much to budget for rental property maintenance. No formulas are exact, but these are good starting places to plan for routine maintenance or unexpected repairs.
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.
A Baltimore Property Management Company Helps Manage Maintenance Budgets
Applying these insights can help you prepare for maintenance expenses for every property in your portfolio. However, with all involved in managing multiple properties, you can best maximize your profits by hiring a Baltimore property management company.
At RentWell, we apply expert strategies to help keep maintenance costs down while optimizing your revenue. 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.