Don’t Underestimate The Cost Of Ownership

Often, investors think about the hidden costs of owning a home or property – but they’re not the only cost of ownership. In fact, it’s perhaps more important to think about the ongoing costs of maintenance and rehab. It’s so easy to underestimate what things cost. I still do this after years of being in the business. I walk through a property, I get a number in my head that’s entirely arbitrary, I decide that’s all I’m going to pay, and then I get upset when materials and labor end up costing more than that number. 

You have to be conscious of all the costs of owning a home – especially for investment purposes –  because everything does have a cost. It’s so important to make a budget when you’re putting money into maintenance and rehab so you don’t overspend. 

How to Set Aside Money for Rental Property Maintenance 

Since you know it’s crucial to approach any rental property maintenance costs with a budget in mind, it’s also important to keep in mind a percentage of the money you need to set aside for each property. This will differ in high-income areas and with properties that are worth more – and subsequently can bring in more money for rent – but it should be something you consider for all properties you own. 

Most real estate investors underestimate the hidden costs of ownership for repairs that may have nothing to do with how a tenant treats the property, such as a furnace needing to be replaced, a new septic tank, or roof repairs. People also like to crunch numbers when it comes to property management costs, taxes, insurance, and other fees. Yes, those costs do add up. 

However, the already high costs of ongoing maintenance and rehab can add up even more in higher-income neighborhoods where the standard neighborhood costs are higher. Likewise, there can be more unexpected, high-cost repairs that need to be made in lower-income neighborhoods. 

 So how much do you set aside for these properties? 

• At a minimum, you want to be setting aside at least 10%.
  • For example, if you’re renting a property for $2000 a month and you’re reserving $200 – which is 10% off the top – at the end of the year, that’s only $2400 in reserves. 

Keeping that $2400 in mind, a roof repair can cost $10,000 or more, sometimes even in the range of $14,000-20,000. You’d have to rent a property for years at that level of savings to afford more expensive repairs, so I’d advise saving over 10% if you can. 

It’s much easier to use that 10% figure if you have multiple properties. With multiple properties spread out across your overall portfolio, you could command $10,000 in gross a month – and that’s real money at the end of the year. But if you only have one or two properties, you need to consider keeping a decent cushion for one or two catastrophes a year. 

Rehab & Repair Costs May Be Higher With Lower Income Rentals

There is a better chance you’ll have more problems with lower-income rentals. Sometimes costs can add up with maintaining higher-income properties, but in lower-income housing, things have a likelihood to break more often, which means more money is spent on repairs than what you might pay out to maintain a higher-end property. All things equal out. 

I have approximately 35 doors out of Springfield, Ohio, just outside of Dayton. It’s definitely a lower market overall. I set aside 20% of every dollar I collect every single month for repairs because a lot of these homes were built in the 1930s and 1940s – and some of them even before the 1900s. There’s more than can go wrong in older homes. I can’t tell you how many water and sewer lines have gone bad, sometimes to the tune of $6,000 a pop for repairs. So I do try to err on the higher side of how much money I’m setting aside, especially when it’s time to make updates. 

• For example, replace all the carpets in your rental property with vinyl flooring that will wear well and last longer. 

This can free up money in your budget for other things. When it comes time to replace a kitchen, I want to be able to get higher quality products – and I need to ensure I’ve got the available funds to do that. 

I can’t stress this enough: If you’re in rental property investments for the long run, at some point you’re going to have to crunch the numbers and decide how much makes sense to set aside and be prepared for the potential costs because there will be potential costs at some point. You have to have money available to cover the inevitable. 

Final Thoughts

The cost of property management is only a drop in the bucket when you consider the potential for overspending on rehab and maintenance. With the right guidance, you can have the peace of mind that the day-to-day costs will be managed by a team of experts who values our owners’ properties as if they were our own. And, just like you, we wouldn’t want to overspend on our own properties. Since our core values include keeping your best interests at heart – and are at the center of what we do at Roost – the looming concerns of exhausting your budget on ongoing repairs can be put at ease.