Basic Budget Formulas
It may be useful to use some basic formulas to determine your repair budget. This can give you the ballpark in which you’re playing. Some experts recommend the 1% Rule. That is, you budget 1% of your property’s value per year for repairs.
Your building has a property value of $200,000.
200,000 x 0.01 = 2000
Your annual repair budget, according to this formula, is $2000, or roughly $167 per month.
There are a lot of factors that can influence this figure, including the age, condition, and size of your building. Generally, an older building (or a class B or C) will require greater expenditures in terms of repairs.
And remember, if you’ve budgeted $2000 for the year, needing to replace a water heater, for example, will put a sizeable dent in that.
There are other formulas you can look into:
- The 50% rule. Here, your operating costs (taxes, insurance, maintenance, repairs) equals half of your property income. If, for example, your property rents for $2000 a month, half of that ($1000) keeps the property going. Isolate out relatively stable taxes, insurance, and routine maintenance, and set aside the rest for repairs.
- Square Footage. Some property owners budget $1 for every square foot for maintenance and repair costs. So, if you have a 2500 square foot building, that’s $2500 dollars a year.
- 5X. Plan to spend 1.5 times your monthly rental rate. If your single-family home rents for $1500 per month, for instance, you’ll budget 1500 x 1.5 = $2250 per year.
Property owners often find that repairs cost more than they anticipate. Saving more than the formulas suggest is a smart move. You should have a fund or savings account for capital expenditures so you can take care of the “big ticket” items (e.g. roofs, siding, HVAC system replacement, etc.), and budget in for more routine repairs.
For example, if you follow the 1% rule, boost it to 2 or 3% to build yourself a cushion. If you don’t use it, great! Roll it over into your capital improvement fund or another savings vehicle. If your repairs cost more than that 1%, though, you’ll have the resources you need without having to draw on your savings or other sources of revenue.
Stretching Your Property Repair Budget
If you’re considering having your property professionally managed, you may think twice (or three times!) because it is another line item on your budget. But it is worth noting that an experienced property management company has a network in place.
They’ve built relationships with contractors, vendors, and tradespeople in the area. They can often negotiate deals, discounts, and bulk supply purchases because of the number of properties they handle. This lowers your cost as an owner. This can help you keep your repair budget in check.
The bottom line: whatever formula you use to determine your repair budget, build in 10-20% extra. You’ll be glad you did if you encounter overruns. And if you don’t, you’ll be pleased to direct these monies into other areas. If you need help figuring out the ins and outs of managing your property, contact us today.