Maintenance Proportion of Rent?

Question

Hey guys,

I was wondering what the typical maintenance cost as a proportion of rent is.

Theoretically, if we do segregation analysis to see what the rate non building equipment depreciation is, that is our maintenance. Is that assumption correct?

Bill Gulley · Answer

Jack, damage deposits are for damages caused by the tenants and it does not include normal wear and tear from customary reidential use.

To start with, any rental property, a SFD or a 500 unit complex, needs to have a maintenance audit. You need to inspect your property carefully and estiamte the useful remaining life of such major items as HVAC, roof, windows, flooring, cabinets, appliances, etc. This will give you only an idea of how long these items may last or when they should be replaced.

You need to cost out what those repairs would be, get an estimate for major items. That can usually be done with a little investigation. If you have determined that a roof must be replaced in 6 years, ask your roofer howprices have increased over the past and what they forsee as a cost in the future, their guess will probably be as good as any. You can estimate smaller jobs over time as well.

Spread your maintenance over a timeline, what must be done next year, in two years, etc. and  total all costs for each year.

For small investors, you can almost divide what is required to get the contribution needed to save. For larger project you might bring those total amounts back to a present value/payment required with interest.

This allows you to have a saving account or better known as a sinking fund on your books, funds set aside for future maintenance expenses.

Many also contribute the amount of depreciation claimed for the sinking fund, still retaining the cash on hand.

Gradually you will have an emergency fund here that can take care of the small stuff, insurance deductables for an insured loss or an HVAC repair.

If you are starting out without reserves, I'd suggest you work for nothing for a few months as part of the deal to get this cushion in place, you could lose out if you had a problem that you can't afford to fix and your tenants move out on you!

IMO, you need at least a couple thousand cash on hand for emergencies, after that build your account to cover the expected expenses.

When lenders are looking at your needs, they will generally assign 10 to 15% for maintenance, depending on age and preceived condition and perhaps 20% according to experiences they have in the area. This is the only time I used a % as an estimate, at the beginning in the purchase analysis, after acquiring any property it got an inspection.

If you have personal property involved, you can get an idea of replacement times from warranties, the dealers and determine the usage or hours the property is consumed. Some equipment may have a salvage value that will reduce your sinking fund requirements.

IMO, it's better to have a plan to replace than to be surprised and hope you saved enough on a % basis. Good luck....

Robert Steele · Answer

And of course remember that often when it rains it pours.

I had smooth sailing this year with only minor to no repairs until June and then all hell broke loose. It has just been one multi-thousand dollar repair after another since then. They are getting very creative too. For instance, someone poisoned a huge 80 year old oak tree that I had to have cut down. Who the hell can plan for these things?

Jeff S. · Answer

It makes all the difference in the world if you do a rehab upfront or if you do it out of future rents. If you start with a building in need of repair and fix it up slowly you could spend as much as 20% (long-term) on maintenance, repairs, capital expenditures and general cleaning and upkeep.

Chris Martin · Answer

In addition wo what Bill said, to help get a more precise number, you can try Form 998 that identifies your property expenses (and income) as well as reserves for capitalized items. A 20 year old property with original roof, A/C, appliances, etc. will have significant reserve requirements compared to new construction. Fill out the form to help get to a dollar amount... or make it a range if that helps you more. Better than guessing, IMO.

Ryan M. · Answer

Which is why there is no way without knowing anything, anyone can say what this is building is....

I'm reviewing P&Ls on a 48 unit where costs are averaging 73% for the past 4 years. The owners are older and the PM is sticking it to them where you know where but its hard to put a % repairs, maint, etc., with such messed up numbers.

James Martin · Answer

8% to 10%

Steve Babiak · Answer

You can perform your own "reserve study", which is what condo and HOA are supposed to have.  Check this link:

http://en.wikipedia.org/wiki/Reserve_study

Scott W. · Answer

For condos & HOAs, you can budget a little less more for maintenance as your exterior costs will be less. Almost everyone hates HOAs (me included as I hate to waste any $) but some of this is budgeted towards roof, siding, gutters, sidewalks, trees, etc.

My HOA investment property even hired an attorned to protest the property taxes & won.

Bill Gulley · Answer

With an HOA/Condo, I suggest you get with the HOA and see what their schedule is, if any, and what they have done in the past. You also want to know if there are any future plans for improvements or additions. These can easily be unknow expenses with an HOA as many are not managed professionally and they send out out a bill on an as needed basis. In which case, you'll have more due diligence to estiamte future bills. If you haven't noticed, I'm sorta anti-condo due to HOAs! :)

Jack Lee · Answer

I see. It will be a single family rental or condo rental.

I will do the diligence to see what the expected replacement costs are and the useful life remaining.

Maintenance Proportion of Rent?

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