When we first purchased a house, we thought the only expense would be the mortgage. Haha!
Little did we realize that the mortgage is only the beginning.
Homeowners pay for an absurd amount of operations, maintenance and repairs:
Trash service. Water and sewer bills. Gutter cleaning. Termite treatment. Pest control. Power-washing. Replacing the siding, windows, roof, fascia, rotted joists, appliances, floorboards, drywall holes. HVAC tune-ups. Reinforcing a crumbling foundation.
The list goes on …
How can you estimate home repair costs? Read on.
What’s in a Mortgage?
First, let’s start with the obvious expense that leaps to everyone’s mind: the mortgage.
Your mortgage payment consists of four elements:
- Principal (Your Equity/Ownership)
- Interest
- Property Taxes
- Homeowner’s Insurance
Together, these are called “PITI” (Principal, Interest, Taxes, Insurance), which leads to the obvious joke: “Homeowner? What a pity!!”
How much will this cost? As of January 2015, the national average interest rate is 3.63 percent on a 30-year fixed loan for borrowers with good credit. If you’re cash-out refinancing a home, add one to two percent to the standard mortgage rate. If you’re putting less than 20 percent down (which I don’t recommend, unless you’re getting a screamin’ deal), you’ll also need to fork over private mortgage insurance, or PMI.
Insurance
As a general rule-of-thumb, homeowners insurance costs $4 per every $1,000 in home value, per year. (Or $400 per every $100,000 in home value.)
For example:
House: $200,000
Divided by 1000 = 200
Multiplied by $4 = $800
Homeowner’s insurance on this $200,000 house would cost $800 per year, which divides out to $67 per month.
Again, that’s a broad rule-of-thumb, so give yourself “wiggle room.” Remember: rental properties carry higher insurance premiums.
If your rental property is vacant, you’ll need “vacancy insurance,” which is more expensive than regular insurance. (We pay an additional $70 per month, on top of our regular homeowners insurance, for vacancy protection on a rental property that’s only worth $50,000.)
Water
When it comes to utilities, you control your destiny (within limits).
When we purchased our three-unit apartment building (triplex), the water bills regularly came to $350/month, or $120/month per apartment. Ouch!
So we embarked on an all-out Water Bill Offensive. We installed low-flow toilets, low-flow shower heads, and low-flow faucets coupled with additional aerators. We even redesigned the yard to minimize water usage. Eventually, we wrestled the water bill down to $120/month — only $40 per month per apartment. Hooray!
The moral of the story: You can chop (some) of your costs by more than half — but it’ll take focused effort in the beginning.
Trash
This rate will vary based on your city. We own 5 houses in Georgia, and pay around $33/month for every single-family home.
My triplex costs $100/mo for trash ($33 per unit * 3 units), because the City of Atlanta regards each unit as a separate home. Not all cities insist on charging multi-unit houses as “separate” houses, so research the policies of your particular city. If you have more than 4-5 units in a single building, it’s often cheaper to just forgo the city trash services and rent a dumpster through a private company (assuming your city allows this.)
Repairs and Maintenance
Here’s one of the BEST rules-of-thumb I’ve ever heard: Repairs and maintenance will cost one percent of the purchase price per year. In other words, for every $100,000 worth of house, you’ll spend $1,000 per year on maintenance.
“WTF? That sounds way too high.”
Au contraire, my friend.
- Basic vinyl windows cost $250, including installation, permits and haul-off, and need replacement every 30 years. If your home has 20 windows, they cost $166 per year.
- An asphalt-shingle roof on a 1,500-square-foot house will cost around $10,000 and needs to be replaced every 25 years. Your roof costs $400 per year.
- Carpet, padding, installation, haul-away and disposal costs $15 per square yard and needs replacement every 8 years. If your home needs 100 square yards of carpeting, this costs $187.50 per year.
Apply this to everything: Water heater. HVAC. Gutters. Siding. Paint. Plumbing. Toilets. Shower valves. Countertops. Cabinets. Sink basins. Floor tile. Porches and decks. Appliances. Smoke alarms. Even outlet covers (yes, little things add up, especially when labor costs are involved).
We’re not done yet.
Those are replacement costs, but each year, you’ll have maintenance costs, as well. Your carpets need deep-cleaning. Your air-vents need professional suctioning. Your pressure-treated deck needs another coat of stain. You need to shell out for pest control, termite treatments, gutter cleaning, lawn aerating, re-sodding, mulching, weeding, re-sealing the grout around your tub.
Scared yet?
Don’t worry. This is where a “Home Repair Fund” comes into play.
Open a special savings account that’s earmarked specifically for home repairs and maintenance.
Many people don’t like the idea of cash “sitting” in their savings account, earning a return that’s so low it can’t even keep pace with inflation. I’d rather forgo some returns so that I can sleep at night. The water heater can burst at 2 a.m., or the dishwasher can overflow, ruining the carpet, or any number of other things can go wrong. When that happens, I like knowing that I can write a check to cover the bill, without breaking a sweat.
Property Management
This tip applies only to rental properties, of course.
Management usually costs 100 percent of the first month’s rent (for each new tenant), followed by an ongoing 8 to 10 percent fee. In addition, managers may charge extra fees for eviction proceedings, nuisance inspections and other additional work.
Sure, you can manage it yourself — but this takes time, and time is money. If you manage it yourself, you should pay yourself. You can’t pay yourself $0 and pretend your “profits” are higher — that’s B.S. accounting. “Make a profit AFTER paying yourself. That way, you can remove yourself from the equation and the numbers will stay the same.)
**************
Take action!
- Track your net worth.
- Start a side hustle! How to start a blog in 5 minutes.
- Travel without paying for flights. Here are my favorite cards for free airfare.
Learn How To Escape the 9-5
Get free updates on building wealth and living to the fullest.
Zero spam.
Looks like a good comprehensive examination of owning rental property. Some of the expenses are very difficult to project. One of the many reasons owning rental property can be such a hassle.
@Dr. Dean — It’s nice to keep a solid margin of error. If you’re looking at a property that — in the most-likely-case-scenario — will cash flow $100 a month, I’d skip over it. Even a slight miscalculation (an insurance rate hike, a water rate hike) could put that property into negative-cash-flow zone. I usually do 3 calculations: best-case, medium-case and worst-case scenario. If the worst-case scenario still leaves a little margin-of-error wiggle room, then I’ll go for it. Otherwise, I’ll skip it.
Wow water is expensive for you! We pay around $55 every THREE months. I guess I’ve been taking our low rates for granted!
@Michelle — My goodness, the water/sewage rates in Atlanta are insanely expensive. The neighboring county (DeKalb Co., Georgia) mandates, by law, that each household have 1.6 gallon-per-minute toilets or else they’ll cut off water supply to your house. Isn’t that crazy? I’ve never heard of that. I guess the drought here has been pretty bad for the past few years ….
We have a filter for rainwater and tank to store it. We pay $10/month
Great post. In our rental property agreements, we add a clause that requires the tenant to pay the first $50 of damages each month (no rollovers) — it’s not about saving money but, instead, making sure the tenant has some skin in the game for maintaining the property. This clause has definitely reduced the number of calls we receive for small items and we’ve found that tenants are OK with the clause once you explain the rationale.
This is a very good and very useful breakdown of costs. I recently met a young woman who claimed that water is free; she just hadn’t realised exactly how much and what bills she pays every month.
I’d thought about buying rental properties before and I never knew when to budget for in terms of repairs & maintenance, I’d always heard horror stories about renters trashing places… 1% for repairs seems reasonable though, if you don’t use it, you can roll it over to the next renter.
In terms of the management company vs. yourself, how much time do you estimate you spend managing the property? The standard rate appears to be 10% here.
@Jim — The standard rate in my area is also 10 percent of the monthly rent, plus the first month’s rent of any given lease. If your property manager signs the tenants to a standard one-year lease, that means you pay 1/12 of the rental income upfront, plus 10 percent ongoing. If they sign a tenant to a 2-year lease, though, you only pay 1/24 th of the rental income upfront, with the same 10 percent ongoing!
I would like to congratulate you. amzing blog.
Thanks for posting.
Your blog was right to the point. Thanks for creating it. It’s been a huge help as I’m looking to buy/rent a home very soon.
Hi,
I love your blog!
How do you keep up with what needs repairs/replacements and how often? Do property management companies help with that?
Hmm, I wonder how your “1 percent of purchase price per year” rule applies in highly inflated markets? I live in the Seattle area, and wishing I could, within the next few years, spend in the neighborhood of $600,000 on a very modest home. A mid-range “family” home runs over $800,000 currently. Would maintenance costs keep pace with the higher purchase prices? Possibly, since everything here from onions to shoes costs way more than in the rest of the country…especially anything involving labor… but, should it really cost 3 or 4 times as much to maintain the same home here vs. the Midwest or the South?