Unfortunately it is near impossible to predict when some repairs and maintenance are necessary and with this the costs are difficult to predict the costs.
The majority of costs associated with property investment are fixed and can be planned however repairs and maintenance are a variable expense. Another variable expense would the vacancy however we’ll put that aside for this blog.
The most a landlord can do is try and be prepared for the worst. On the other hand no landlord wants to hold absolutely all of their rental income in fear. So what is an effective plan for
maintenance? The general rule of thumb from various experts is to estimate 1 to 3% of the property value. As of December 2015 the median house price in Perth is $540,000. Taking the rule of thumb above, the owner should estimate somewhere in the region of $5,400 to $16,200, somewhere around $100 to $300 per week. At present the current median rent is $400 per week so based on the above this would amount to 25%, potentially more, of the rental income delegated towards repairs and maintenance. In the world where negative gearing is becoming more and more common this allocation may be difficult for some owners.
This theory in practice seems reasonable if possible however in reality it is impossible to tell how much maintenance is requires. Many things can impact this, such as the condition, age, size and type of property. Also in a single family home the owner pays for the roof, painting and other costs that typically are covered by the strata in a complex or high rise development. So what is the rule of thumb of allocating for repairs in a strata complex? My opinion is that the experts just picked a number, and I do believe that, I can see no science behind this. Older style properties may be of lower value than a newly developed dwelling and therefore a lower allocation for maintenance on this system however they often need greater maintenance. To me this system just doesn’t make sense. As opposed to looking at the value I would look at the return. I think somewhere in the region of 10 to 20% of the income should be set aside for repairs. Using the median rent this would somewhere in the region of $2,000 to $4,000 set aside for repairs. If we estimate $500 towards regular annual maintenance such as pest inspections, gutter cleaning etc then this would leave in the range of $1,500 to $3,500 allocated for yearly repairs. With a proactive PM on your side and a trustworthy tenant meaning repairs are caught early then this is certainly possible. Similarly a landlord may just wish to allocate a certain amount per week keeping for maintenance. Another possible system is to ask your PM to hold a certain amount on your account towards any maintenance. This might mean some slow return weeks initially to build up the account however takes away a lot of the stress.
The main difficulty comes where there are large scale repairs required which happen from time to time. In this instance it sometimes doesn’t matter how you budget. If there is a large scale repair required, unless you have the cash sitting there, the best way might be to organise a payment plan structure. With a PM who has regular contractors this might be easier to negotiate than with a private contractor.
In summary, there are various ways you can organise having funds available for maintenance however there is not an industry standard or a (in my opinion) real rule of thumb. The important thing to remember is that you should have some allocation. PM’s are not miracle workers and cannot organise repairs with no available cash. This presents annoyed tenants and annoyed owners. Think of maintenance to the property as a maintenance of your investment. Your property can continue being rented, your tenants are happy, they keep paying rent. Also, do not forget that you can claim costs used for repairs and maintenance of an investment property at the end of the financial year.