Budgeting for Maintenance

[Poudda]

My wife and I recently purchased a fixer-upper SFH (looking forward to doing some of the work) and I'm trying to find out what a reasonable maintenance schedule would look like. To start, we have to invest some funds to protect the asset (new eavestroughs, window wells, some electrical work, the foundation walls have to be crack filled), and replace some of the flooring. I'll be getting the quotes shortly for these items.

The house is currently rented at $400 per month and cash flows at about $100. Once these Items are done, I'll be able to raise the rent by $50 (and the tenant is okay with this because they know that I will do this work, unlike their last landlord). Anyhoo....

I know that maintenance is between 10-15% per month, so my question is: What is the best strategy (or your strategy) for allocating the 10%-15%?

Should I try as hard as I can to not spend on the little things (taps, sinks, caulking, supplies, etc), and save for the big things (roof, kitchen cabinets, flooring, appliances)?

Or should I specifically allocate 10% to the bigger items and 5% to the smaller items. What about allocating for emergencies (ie: fridge implodes, furnace dies on Christmas eve and it's -40C in Saskatchewan)?

I've been all over the web, and this forum and in my reference books, but no one seems to cover this fairly essential aspect of the business. I have attempted to make up a budget myself, but whenever I do, it seems that I run out of the reserve maintenance funds and have to seek additional financing to complete some of the work, and I don't want to increase the financing on the building. Any ideas? What do you do?

Thanks in advance, Dave

 

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[reipro]

Dave,

Sell the building!!!!! I am just kidding. Maintance should not run that high. Most budget only 7-10%. If it is an old building a little more. You say that it has a positive cash flow of $100 per month, but you have to borrow money for maintance. That is not a positive cash flow then. I guess you need to reassess your deal and see if it is worth holding on to or if you really do need to sell it

 

[Starsky]

Question. What expenses did you use calculate to end up with $100 cf left over.

Thanks

 

[Poudda]

Got the house for $30K and intend to spend about $10K to fix it up (capital expense - floors need to be redone, siding and some electrical work). Rent is 450/month. Taxes are $100, insurance is $50, property management is $45; $45 per month for maint, and about $25 for vacancy. No mortgage. CF= $185

The issue of course is if I use $45 per month (10%) for maintenance it will take me several years just to save up to get the roof re-shingled (ie. roof has has about 5 years left - $45 X 60 = $2,700), and it will cost about that much to get it done.

In the interim, I have to spend on the regular stuff too. ie had to replace bathroom taps - $100, and who knows what else will come up in the next little while. I also have a few other projects that I want to do on the house. If I want to do them sooner (ie Kitchen needs some work, and so does the basement), then I'll have to get a mortgage sooner than I would like.

One of the Challanges is that I don't live in the area, so I'm unable to do the work myself. That would save a lot of cash, and I wouldn't have to worry as much about the budget.

Maybe maintenance is the wrong word and I should look at it like capital expenses.... however these things still require cash on hand - unless you get a loan - which brings me back to the original question.

Thanks for the replies,

Dave

 

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[Starsky]

Hello Dave
My solution to this would be to charge the capital expenses to a 0% (for a year) credit card in your business name. That way you a year to pay it off and you able to do all the upgrades now. Take the cash flow and pay down the card... For each rental i have, I have a credit card in my company's name that is designated for expenses for the property.. Also helps at the end of the year tax time. & you can write off the payments

 

[Poudda]

That's good advice, thanks. Still brings me back to my original question: How do you budget for the larger expenses while still keeping the smaller stuff in good condition between the big expenses?

Is there a formula? - or do we use, say 5% of the minor maintenance expenses per month and bank the rest for later? Is 5% too high? - should it be only 2% for the small stuff per month?

 

[tbsells]

Hello Dave
My solution to this would be to charge the capital expenses to a 0% (for a year) credit card in your business name. That way you a year to pay it off and you able to do all the upgrades now. Take the cash flow and pay down the card... For each rental i have, I have a credit card in my company's name that is designated for expenses for the property.. Also helps at the end of the year tax time. & you can write off the payments

I think this is very good advice. As far a budgeting for repairs, I don't know how to do it accurately. You just have to make sure you can afford to replace a furnace or water heater when it goes out. The above suggestion is one way of doing that. I buy fixer type properties and turn them into rentals like you are doing. I try to minimize repairs by fixing evrything before anyone moves in. If its marginal fix it or replace it before you rent it. Its easier and cheaper that way. Also you can budget it as part of your capital improvements when you are making the decision to buy or not to buy. Don't try to get by with a furnace that might make it through another winter. It probably won't and you will have a much bigger problem than if you just replace it now. To summarize, I recommend fixing what ever is marginal when you buy it. That will greatly reduce the chances of major surprises. If you can't afford to do it that way, maybe the deal isn't that good.

 

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[Poudda]

That's also good advice. I purchased the unit with renters, and the house is in okay shape, we're putting together a plan to fix up the major concerns while they are there. They're very nice people and very supportive because they really like the house and the location. We will be fixing things as they come up, until my wife and I move to the area. If they move out, then we'll do a complete renno if we haven't already.

Thanks guys!