Author Topic: Maintenance "Rule of Thumb" on Lower Cost Rentals  (Read 761 times)

icebox92

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Maintenance "Rule of Thumb" on Lower Cost Rentals
« on: December 11, 2020, 11:50:27 AM »
Rental property gurus...  I'm struggling with determining an appropriate "rule of thumb" amount to project for maintenance on rental homes that are lower purchase price.  For example, $45,000 house, 1% allocated for maintenance is only $450/year.  Obviously thats not nearly enough.  I think 1.5x the monthly rent gets closer...  So that $45,000 home purchase that rents for 900/month would equate to maintenance of $1,350/year.  Better, but still feels low.  I know that each home needs to be evaluated individually, but I'm looking for some advice on preliminary values to plug in when you are determining whether to move forward with a deal or not.  The 50% rule doesn't seem to cut it when it comes to accounting for maintenance for lower purchase / rents. 


YttriumNitrate

  • Handlebar Stache
  • *****
  • Posts: 1174
  • Location: Northwest Indiana
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #1 on: December 11, 2020, 11:58:11 AM »
A decent rule of thumb would probably have a fixed amount and a percentage. Something like $1000+0.5% a year might be a better estimate.

There are many costs that depend only somewhat on the price of the property. As an example, it usually costs a bit more to replace a water heater at a $300k property as compared to a $100k property, but it's not 3x more.
« Last Edit: December 11, 2020, 12:02:06 PM by YttriumNitrate »

waltworks

  • Magnum Stache
  • ******
  • Posts: 4882
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #2 on: December 11, 2020, 12:03:37 PM »
My personal feeling is that for a standalone/SFH dwelling, the bare minimum is about $2k a year to cover all mechanical systems, roof/siding/paint/landscaping, etc. That's assuming a very small house in basically good shape with nothing weird.

Every property is going to vary, though. You could have a cinderblock place with a metal roof and all electric appliances/no washer or dryer and it could cost less. You could have a 1890 place with a sinking stone foundation and lead paint/asbestos, clay pipes, and shake and longstanding deferred maintenance and it could be a lot more to the point where it makes more sense to tear it down than keep maintaining it.

The 1% for maintenance thing makes zero sense unless you have a totally median home in a totally median location, and even then it's probably not that accurate.

Low end rentals get *killed* by maintenance, management (property managers are going to charge some kind of minimum around $100 a month even if your rent is only $650, unless they're managing a LOT of rentals for you, because low rent does not correlate with low hassle tenants), and tax overhead.

-W

icebox92

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #3 on: December 11, 2020, 12:17:32 PM »
My personal feeling is that for a standalone/SFH dwelling, the bare minimum is about $2k a year to cover all mechanical systems, roof/siding/paint/landscaping, etc. That's assuming a very small house in basically good shape with nothing weird.

Every property is going to vary, though. You could have a cinderblock place with a metal roof and all electric appliances/no washer or dryer and it could cost less. You could have a 1890 place with a sinking stone foundation and lead paint/asbestos, clay pipes, and shake and longstanding deferred maintenance and it could be a lot more to the point where it makes more sense to tear it down than keep maintaining it.

The 1% for maintenance thing makes zero sense unless you have a totally median home in a totally median location, and even then it's probably not that accurate.

Low end rentals get *killed* by maintenance, management (property managers are going to charge some kind of minimum around $100 a month even if your rent is only $650, unless they're managing a LOT of rentals for you, because low rent does not correlate with low hassle tenants), and tax overhead.

-W

Thanks @waltworks!I'm assuming that $2,000K doe not account for CapEx, and is just yearly maintenance?
« Last Edit: December 11, 2020, 12:19:59 PM by icebox92 »

icebox92

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #4 on: December 11, 2020, 12:19:22 PM »
A decent rule of thumb would probably have a fixed amount and a percentage. Something like $1000+0.5% a year might be a better estimate.

There are many costs that depend only somewhat on the price of the property. As an example, it usually costs a bit more to replace a water heater at a $300k property as compared to a $100k property, but it's not 3x more.

Thanks @YttriumNitrate , I agree that seems to make more sense... now to determine what that base amount should be.  In your experience, is that $1,000/ year a decent base amount?  I'm assuming it doesn't include CapEx?

waltworks

  • Magnum Stache
  • ******
  • Posts: 4882
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #5 on: December 11, 2020, 12:21:40 PM »
I was including Capex. Again, it's a bare minimum number - ie, you'll replace the broken dead fridge with a cheap used one from Craigslist, you'll hold off on redoing the roof as long as possible, etc. Most places are going to cost more than that.

I think reasonable people can disagree (though not the IRS!) about what constitutes a capital expenditure and what is maintenance. So I just consider them basically the same thing. Not doing maintenance leads to more capital expenditures, at least.

-W

icebox92

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #6 on: December 11, 2020, 12:31:53 PM »
I was including Capex. Again, it's a bare minimum number - ie, you'll replace the broken dead fridge with a cheap used one from Craigslist, you'll hold off on redoing the roof as long as possible, etc. Most places are going to cost more than that.

I think reasonable people can disagree (though not the IRS!) about what constitutes a capital expenditure and what is maintenance. So I just consider them basically the same thing. Not doing maintenance leads to more capital expenditures, at least.

-W

Whew...  That makes me feel a little more comfortable.  I've carried approx $2,100-$3,000 for purchases that range from $47,000 to $82,000.  They all cashflow well at that price point, and could handle more $ for maintenance / CapEx, so I'm glad to hear I'm not WAY off base.  I need to continue to refine the numbers / track costs, but I'm glad that my newbie numbers aren't the exact opposite of a guru's number :)

waltworks

  • Magnum Stache
  • ******
  • Posts: 4882
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #7 on: December 11, 2020, 01:15:29 PM »
Given that I currently own zero rentals, I don't think "guru" is accurate.

But yeah, I'd say you're right about on target. $200 a month, give or take, should cover most stuff for a small/cheap place.

-W

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1271
  • Location: Midwest
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #8 on: December 11, 2020, 04:05:56 PM »
A really good home inspector? Maybe get 2 of them?

They are really all over the place and hard to tell. Some years I spend like 5k on my various AC systems, some years I sepnd a few hundred bucks on AC. Its just too variable to tell.

I would say there is a correlation between just how a house looks and feels. If its beat to hell, and from 1965, you can assume the worst type thing. If the paint cans are organized alphabetically in the basement, it  has probably been taken care of....




PMJL34

  • Stubble
  • **
  • Posts: 210
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #9 on: December 11, 2020, 08:11:23 PM »
It's so hard to tell for me.

For example, how often do you want to update the kitchen or bathrooms or paint? What grade material are you going with? Do you prefer to do prevention or do you wait for something to break (replace hot water heater every x years vs waiting for a failure). That's all inside, do you have a yard?

I could probably make it work for very cheap, but wouldn't want to in my area.


PMJL34

  • Stubble
  • **
  • Posts: 210
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #10 on: December 11, 2020, 08:14:14 PM »
Also to add:

There are owners who absolutely refuse to fix anything/spend money, but this method actually costs a lot more later and wouldn't recommend it.

SndcxxJ

  • Stubble
  • **
  • Posts: 107
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #11 on: December 12, 2020, 09:45:01 AM »
I can't speak to low cost of living areas, but my rule of thumb is to set aside 19% of the rents for maintenance/capex (14%) and vacancy (5%).  I self manage my rentals, do all maintenance and remodel work, so your numbers might be different.  I typically suggest 25-30% of rents to others who aren't as hands on.  In my area this 19% I once calculated to about 1.1% of property value, but honestly I don't really think about it that way.  I just need to know how much of the rents each month to set aside. This amount will be able to properly manage property for the long haul, keeping the places nice and not allowing deferred maintenance to accumulate.

icebox92

  • 5 O'Clock Shadow
  • *
  • Posts: 62
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #12 on: December 14, 2020, 01:05:54 PM »
Thank you for the input everyone... I'm going to way of keeping a set $ amount for each preliminary evaluation, and then going from there (most likely upwards).  This leads me to peoples experience with the 50% rule in regards to LCOL homes.  I've always heard that the 50% rule breaks down with very expensive homes, as well as very inexpensive homes... I wonder what peoples experiences are in that regard.  Maybe I'll start a new topic...


waltworks

  • Magnum Stache
  • ******
  • Posts: 4882
Re: Maintenance "Rule of Thumb" on Lower Cost Rentals
« Reply #13 on: December 14, 2020, 02:25:00 PM »
With cheap places it becomes a tax/management/insurance crapshoot. There are very cheap places in low tax areas, there are also places that are cheap *because* taxes are so high. Some places with cheap/lower rent properties are solid working class and easy to manage. Others are D neighborhoods where managing is going to cost a fortune in money and time and frequent major problems/insurance claims will kill you too.

I mean, I have seen places you can buy for $50k, rent for $700 or so a month, and lose money - yes, outright lose money. The 50% rule is a cruel joke if your annual taxes are eating that amount by themselves, and there are places in the mid-atlantic worth way under $100k where taxes are $4-5k a year.

-W