Investment property ownership can be an exciting step towards financial independence—but it comes with a steep learning curve. You're taking on significant risk and want to ensure you have the funds to keep it in check in case things go wrong.
One of the best ways to alleviate the pressures and prepare for future roadblocks is to create an operational budget.
However, budgeting is more than just ensuring you only spend what you can. A range of other considerations, such as a rental property maintenance budget, capital improvements, and expenditures, impact overall profitability and cash flow.
This blog looks at strategies and best practices for property owners wanting to budget for financial success and peace of mind!
Investment Property Budgeting Best Practices
Budgeting is a way to minimize rental property expenses in real-time and protect against future costs. Look at the following budgeting guidelines to set up a successful strategy.
Create a Budget for Each Rental Property
Considerations that will impact costs include the age of the home and utilities, the necessity of upgrades, and more.
Upkeep, such as repairs and renovation, and location-specific factors, such as houses in storm-prone areas, may require a bigger buffer than those in less extreme climatic regions.
Build An ROI Friendly Maintenance Budget
Maintenance costs can be a drain, but they can also be an opportunity to add value to the property.
Opt for future-friendly features to maintain or add to the property's current value and reach your ROI goals.
Cover All Budgeting Basics
While each property is unique, there are still overlapping maintenance costs that most properties share.
Some of these include:
Electricity, water, plumbing, gas
Homeowner association costs
Tenant screening costs
Accounting and legal fees
A solid budget should factor in all of the above considerations, and they can also form the basis of a rental property budget spreadsheet.
Rental Property Maintenance Budget
There are recurring maintenance costs that must also be taken into consideration when budgeting for an investment property.
- Preventative maintenance: This requires ongoing work on the house's major systems (HVAC) or external threats, such as animal infestations that can cause extensive and long-term damage.
- Emergency maintenance: Property owners must set funds aside for unexpected maintenance emergencies, such as severe storm damage to property.
- Seasonal maintenance: This includes weather-specific maintenance tasks such as removing leaves in the fall or checking the health of the hot water system in winter.
- Appliance maintenance: Ensuring all appliances are in operating condition.
A property manager can tell you that a rental's maintenance budget can be a significant portion of the overall operating budget. Still, it's important to fund maintenance aspects appropriately to avoid costly problems.
Partner With Economical and Skilled Vendors
Forming relationships with trusted tradespeople will help you pay less for maintenance services, build a database of trusted vendors, and gain insight into potential cost-saving areas.
One of the easiest ways to access a database of trusted vendors is to go through a Philadelphia property management group like Rentwell.
Employ Strategies To Minimize Costly Repairs
Hidden costs and large money sinks can pop up at any moment, whether it's adverse weather or unruly residents.
Luckily there are some strategies to minimize the rate of occurrences, including:
Avoid costly repairs through routine and preventative maintenance such as HVAC systems, fire alarms, and pest control.
Thoroughly screening vendors for professional licenses, past contracts, inspection records, referrals, and years of experience. Watching a few YouTube videos and reading a manual can be tempting, but more often than not, maintenance is best left to the professionals.
By following these steps, you will minimize potential costs.
Refer to An Accountant To Track Costs and Receipts
Accountants can help investment property owners budget effectively by tracking expenses and receipts. In addition, they can assist with tax-minimizing strategies, look for areas of improvement and offer general advice.
Maintenance Cost Estimation As a Property Owner
Estimating maintenance costs will help you avoid unprofitable investments and prepare an appropriate budget for upkeep. Here are two strategies to apply when planning your budget.
The 1% Formula
Using this formula, property owners should set aside 1% of the house's sale price every year for maintenance costs and emergencies.
For example, if your rental property costs $200,000, then $2,000 per year should be your target range of maintenance necessities.
The Square Footage Formula
In the Square Footage Formula, owners allocate $1 for every square foot of the property. Therefore, a 2,000 sq ft property will require $2,000 for maintenance costs.
Bonus Tip: Hire a Property Manager
Property managers can help plan and maintain your maintenance budget! In addition, the right rental management experts can take charge of maintenance issues without owner approval. This results in less stress for property owners and happier tenants.
When working with a trusted property manager, set aside meeting time to lay out maintenance, upgrades, budgets, and ROI goals.
A Rental Property Maintenance Budget Doesn't Have to Be a Challenge
Experienced property investors know that a well-thought-out budget is a tool for the future and protection against losses and unforeseeable events.