Wouldn’t it be great if 100% of the rental income from your Colorado investment property went straight into your pocket? But sadly money doesn’t grow on trees, there is no pot of gold at the end of the rainbow and Santa Claus isn’t real. So, we’ll just have to deal with the reality of needing to earmark a high percentage of your rental income for expenses and leave the fantasies for fiction writers.
It’s important to know that the operating expenses on a real estate deal are usually estimated at between 35-80 percent of the gross operating income (GOP). This figure depends of the type of rental property to own. One expense area that is typically under budgeted is property maintenance. Not being able to afford proper maintenance on your Colorado Springs investment properties can have long-term negative effects on your investment.
Investment Property Planning in Colorado Springs: Your Personality Profile
People fall into three categories regarding the maintenance planning and budgeting of their investment:
- Emergency Reactors: In this scenario people will only deal with maintenance when there is a crisis that can’t be ignored. Otherwise any maintenance issues are put out of sight and out of mind.
- On The Ball: If there are any issues with the property these people will proactively sort them out quickly. They will always solve any problems but they haven’t actually committed to a maintenance plan.
- Forward Thinkers: These guys get the gold stars –they have a plan, they have set money aside and they are already predicting possible maintenance issues that might need attention.
You want to strive to keep your rental in good condition. If you ignore smaller problems they will escalate to larger, costlier repairs. When you put a solid maintenance plan in place for ongoing upkeep you are protecting your investment for the long run. Appliances like water purification systems, fences, fireplaces, air ducts, decks, plumbing, and other integral parts of a home are easy to overlook but need routine maintenance.
Best Budgeting Formulas
So, how do you work out the potential maintenance spend in a year? It’s seemingly impossible to calculate what could potentially go wrong. However, there are a few formulas that can give you a fairly accurate prediction of the amount you should be setting aside.
1. The Percentage Formula
This formula suggests that you budget 1% of your property’s value to be set aside for maintenance. (Fanny Mae says 2%). If your rental property is worth $300,000 then you need to put at least $3000 into your budget.
2. Property Square Footage Formula
Simply add up the square footage of your rental property and put aside $1 per square foot. If you have a 2,000 square foot investment property you can budget about $2000 for the year’s maintenance.
3. Property Pain Spots Formula
There are a few key factors that can assist with estimating your potential maintenance costs:
- If your property is 10 years or older it might require more attention. You might have to plan for bigger expenses like a new roof or electrical wiring upgrades. Keep a close eye on the overall condition of the property.
- If you have not routinely maintained the property, it will cost you more over the year. If you neglect to keep up with repairs and renovations, you will pay a steep price.
- The type of property you own will also effect the amount you need to put aside in your budget plan. A condo or HOA home will have considerably lower maintenance costs than a residential, single-family home.
- If your rental property is situated in a harsh climate, a high flooding zone or prone to pest infestation you will have to factor these into your yearly maintenance budget.
Pain Spot Predictions
When you take the above factors into account you will need to find additional budget to cover them. First you take the average of your square foot formula and your 1% formula. Then add 10% of that average for every additional pain spot facing your property.
1% property value = $2000
Square footage = $3,000
The average of the two is then $2500
10% of that amount is $250
You will now add an additional $250 for every factor that effects your property from harsh climate to property type etc. If you have three factors influencing your property, you will then budget $3250 for your maintenance budget.
Growing Your Investment
Maintenance may seem like a headache expense but it doesn’t have to be expensive. If you regularly maintain your investment, it can help you to save in the long run. There is a statistic that does the rounds that says for every $1 you spend on maintenance, $100 of repairs are avoided. This is clearly one area you cannot afford to ignore.
Always ensure that the very basics can be covered easily and any left over budget at the end of the year can then be used for improvements or renovations. Make sure that you keep an up to date maintenance log so you can monitor your monthly and yearly costs so you can try to accurately predict the following years expenses. Look into budgeting for energy saving upgrades like energy-saving light bulbs, energy-efficient windows and motion-sensor lights. This investment will pay great dividends in the future.
Related article: 4 Tips for Managing Your Colorado Springs Investment Properties
When you calculate these costs accurately each year and add it to your overall operating costs budget, it gives you a great indication of whether the property is a financially viable investment. Hire an investment property manager in Colorado Springs that will monitor and care for your properties when you don't have the time to visit them yourself.