Investing Basics

Setting a Budget for Property Maintenance: The Square Foot Rule

Setting a Budget for Property Maintenance: The Square Foot Rule
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Determining how much to budget for maintenance and repairs for your property is a difficult task. Unless you have a crystal ball, it’s almost impossible to know what the year will bring and how much it will cost you. Fortunately, there are some calculations you can make based on average homeowner costs, to help you make an informed decision for your investment.

Table of Contents - Setting a Budget for Property Maintenance: The Square Foot Rule

Let’s explore the Square Foot Rule. These factors can help you determine the right number to budget for maintenance and repairs for your property.

The Square Foot Rule - Budgeting for Property Maintenance 101

A quick strategy on how much you should budget for property maintenance is to allocate $1 for every square foot of the home. If you own a 1,500-square-foot property, budget $1,500 per year for maintenance and repairs.

Simple, right?

The Square Foot Rule is preferable to other calculations, like the 1 Percent Rule. The 1 Percent Rule says that you should budget 1 percent of the home’s purchase price for annual maintenance and repairs. If your home costs $200,000, you should budget $2,000 per year.

The Square Foot Rule makes more sense to use as your base calculation because the larger the home the greater the expenses. Conversely, the current real estate market, the seller and your negotiations impacted your final purchase price. If you bought the property at the peak of a bubble or managed a great discount, your maintenance budget shouldn’t be affected. The price of your home and the price of maintenance are generally independent, making the Square Foot Rule a better estimate.

One factor the Square Foot Rule doesn’t account for, however, is the cost of labor. Maintenance and repairs for a 1,500-square-foot property in Toronto will be different from those in Windsor. The price for contractors, labor and building materials may vary by area.

Factors Impacting Your Maintenance and Repair Costs

The Square Foot Rule is just a starting point for calculating your annual budget amount. Here are other factors to consider to determine a more realistic number:

Type

Single-family homes require more maintenance than condos or duplexes. If you own a single unit within a multi-family building, you’ll have fewer maintenance costs than a three-bedroom house with the same square footage.

Your home type may also influence what type of tenants you have:

A revolving group of college kids will likely cause more damage than a family renting long-term.

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Weather

Homes battling freezing temperatures face threats to the plumbing, roof and HVAC system. High winds are also damaging to properties, and nearby trees or power lines will be a looming threat.

Location

Similarly, a home’s location determines how the elements impact the home. If the home is located at the bottom of a hill or near water, it may be subject to flooding. Local pests can also cause costly damage.

Age

A new house likely needs much less maintenance than an old house. A 20-to-30-year-old property may need a new roof, new HVAC system or other expensive repairs. Houses older than 50 year may have electrical, plumbing or other infrastructure issues that may not only be outdated, but also hazardous.

Condition

Old houses may need fewer repairs than a newer house depending on how well the previous owners maintained the property. Cheap maintenance and repairs or unaddressed issues can cause even more problems. If a home is older, poor maintenance can add a lot to maintenance costs.

If your property is subject to any of these factors, adjust your initial Square Foot Rule estimate. For each factor that adversely impacts your home, add 10 percent to your budget.

For example: If you have an older home in an area that regularly sees freezing temperatures, increase your estimate by 20 percent. Using the Square Foot Rule for your 1,500-square-foot-home: $1,500 × 1.2 = $1,800 annually/$150 monthly.

Finding Your Number

The Square Foot Rule is an estimate to help you get an idea of the expenses to budget for based on your property size. If the 1 Percent Rule seems more logical for your property, use that. Or, calculate with both formulas and take the average. The maintenance and repair costs should average to meet your budget over time, but some years will naturally have more repairs than others.

Regardless of which method you use, it’s important to always have money set aside for property maintenance and repairs. Your property is your investment, and proper maintenance will help you receive a greater return on investment in the long run.

If you're handy and can perform many of the renovations yourself, you can use a lower figure when budgeting for property maintenance.

You must also consider that if the property needs structural repair the cost per sq.ft will increase. These measures are just a guideline but each property will have different needs.

Speak to Your Lender for Additional Options

Some lenders offer a program called purchase plus improvements. The lenders that offer the purchase plus improvement program also offer this program when refinancing an existing mortgage.

Utilize mortgage plus improvements when you need additional funds for major repairs.

In short, an improvement loan is a PRE-approved amount of lending your lender will give you for improvements to the property.

Purchase plus improvements guidelines;

  • You must supply a quote for the renovations to your lender
  • The lender will send an appraiser out to your rental property to confirm the value of the property after the renovations.
  • If your income supports the additional loan the lender will approve the mortgage.
  • The funds are not immediately given to you, they are held at the lender until you prove you have finalize the renovations.
  • To prove the renovations have been completed, the lender will send an inspector out to confirm.
  • If everything is good, they will realize the funds to you.

When you renovate a property heavily, and use the lenders' money, you can achieve a much lower cost per sq.ft for property maintenance.

How to budget for Rental Property Maintenance Expenses


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