Inevitably emergencies happen and it’s simply part of and parcel of doing the job. Some emergencies might not be too terribly expensive while others will hit your pocketbook hard. Therefore, it poses an issue to every landlord when they want to figure out how much money to put away for each rental property that they own. Many landlords are confused as to exactly how much they should be putting away annually for repairs to rental homes as well as other costs that may arise.
Following the 1% Rule:
One widely-followed recommendation is that landlords should be putting away a minimum of 1% of the value of the property away for maintenance and additional expenses for things that may break or need repairing. This would mean that if you have a $150,000 property on hand you would want to put a minimum of $1500 a year for repairs and unexpected expenses. On the other hand, if you had a property worth $300,000 you would want to put away $3000 annually for repairs and unexpected expenses.
What Will This 1% Cover?:
The next question many landlords will ask is, “What will this 1% of the property value that I put away annually go to cover?” The answer to that is that it can go to cover a variety of different maintenance needs that the home will have over the course of being rented out to tenants on an annual basis. Some of that maintenance may include things like the following:
- Basic Ongoing Maintenance Needs: This 1% can help cover basic maintenance needs that properties have when there are tenants living in them. This includes mostly minor maintenance items like changing light bulbs or replacing the HVAC filters on a regular basis. They may seem like smaller expenses but they can certainly add up if the cost is not accounted for over time!
- Occasional Repairs: These repairs are necessary on a less frequent basis but generally a little more significant in costs. These repairs are things such as fixing things that may need to be addressed and are related to things like the roofing on a home or minor carpentry, window repairs/replacements, or needing to replace hardware fixtures that have given out due to use and wear.
- Unforeseen Emergencies: These are the expenses land landlords may not foresee but they are inevitably part of owning a property and will happen at some point. These unforeseen emergencies might be something like a water pipe bursting or the roof leaking or even the HVAC system need extensive repairs or even a complete replacement.
Most repairs landlords have to make will fall into one of these categories. While these expenses may not occur every year, saving 1% of the property’s value on an annual basis will ensure that when a problem does arise the money is there to cover the cost of it.
In the end, the 1% of the property value is a common way that landlords budget to put enough money away to ensure that they are able to cover repairs for their property when the need arises. Saving this simple 1% every single year ensures that when something does need repair (it inevitably will at some point) the money is there to cover the expenses so that the landlord can continue to have the property occupied which provides them with their stream of revenue and source of income.