How much should a landlord expect to spend keeping their home maintained? It's a common question and there are some rules of thumb and considerations owners of rental properties can keep in mind when setting aside reserves to handle unexpected reserves.
- The 1% Rule: this popular rule says that 1% of the purchase price of your home should be set aside each year for ongoing maintenance. Using this logic, if your home is worth $450,000, you should set $375 a month for expected home maintenance and anticipate about $4,500 in repair costs during the year.
- The Square-Foot Rule: another practical approach is to budget $1 per square foot for annual maintenance and repair costs. This rule is slightly more consistent than the 1% rule because it's directly related to the size of the home. Keep in mind, however, that market prices for contractors and building materials can vary significantly from region to region. Using this logic, if you have a 3,000 square foot home, you should set aside $250 a month or $3,000 per year in anticipation of needed maintenance.
- Rent Rate Reserves Rule: This is a common sense approach for owners to set aside between 10-15% of owner distributions received for ongoing and unexpected maintenance purposes. Using this logic, if your home rents for $3,000 per month, you should be setting aside $300 - $450 a month for expected repairs.
- The Blended Approach: Which rule is right for you? One way to hedge a bit is to blend the various methods. Using this logic, you would calculate all of the previous three rules of thumb (1% rule, Square foot rule, and Rent Rate rule), then average them out.
Regardless of your method for estimating annual maintenance costs, some conservative landlords might then add 10% for each factor such as age of the home, weather, overall condition, etc. It seems reasonable to me to expect an older home in harsh weather will need that extra attention to maintenance.
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