Repair and maintenance budget on old property?

Question

How would you guys calculate an expected number for ongoing repairs and maintenance on an old, lower-income type property?

Specifically, I'm looking at a 9-unit building that is about 100 years old and has gross income of around $3600/mo or so. The market value is somewhere in the neighborhood of $180-$200k.

Thanks.

Michael D. · Answer

@Thuy Pham-Satrappe, the building had so much deferred maintenance that it's hard for me to tease out just how much was really 'on-going expenses' VS just catching everything up. For example, I replaced ALL the hot water heaters and completely re-modeled one unit. I also re-did substantial parts of the plumbing to separate out the water onto different meters. The first year my repair costs were higher than the total gross rent. But the repairs were trending steeply downward and only 25% of gross rent after a few years. I ended up selling the building a couple of years ago, and I imagine the new owner experiences much lower expense rates than I did.

If I could give you one piece of advice, it would be to try to fix everything in one shot, all up front. If I had done it this way, instead of bit by bit it would have saved me a lot of aggravation.

For other properties I've since moved to tracking individual mechanical systems and budgeting money every month for their replacement. I don't keep a separate account or anything, I just budget for it in my ROI calculations. For example a furnace costs, say, 12k and will last 20 years, so that's $50/mo. You'll have to figure those numbers out for yourself.

Al Williamson · Answer

I'm late to the conversation, but here's my 2 cents. As a side gig, I used to prepare reserve studies for homeowner associations. In doing so, I would calculate the remaining useful life of the major components and convert that into guidance about how much money should be set aside each month to replace those components when they wore out.

All in all, like Tom Lincoln said, you could use the 80-20 rule and base your own reserve calculations on the heavy hitters (roof, common water heater, exterior painting, plumbing, etc). Throw in an inflation factor and you will you have a great budgeting tool.

I would recommend xeriscape over sod. Saves water and lawn mowing costs.  Invest in a clever landscape design plan and implement it over time. I've learned that you can be a source of inner city inspiration by making your property look better over time (I would not suggest that approach in non inner city neighborhoods).

I own an inner city 8-plex. I didn't think to save for the replacement of the hot water line feeding the apt furthest from the water heater. Hopefully, you'll do better than I did.

Best to you.

Kenneth LaVoie · Answer

Hi there
I've only been an investor for 3 years, but taking everythign I've learned from BP and "in the field," I've come up with a fairly simple system, but one that has some thought put into it:  First, I figure out what's wrong NOW and what's LIKELY to go wrong in the near future (i.e. if the furnace is more than 15 years old, I assume it will need replacing the day after closing!). I add those "initial" capex numbers into my offer price. THEN for 1-4 family, decent neighborhoods, decent condition I might do 8% repairs, maint, and 5% capex whereas older, lower class, potential deeper problems, i would go as high as 12/5 to determine my numbers. So far I've been pretty close.

Jeff S. · Answer

On a survey from National Apartment Association they show on a huge sampling of apartments somewhere close to 10%. This is 6.3% on capital expenditures and 4.6 on repairs and maintenance.

Personally I think they have newer properties that don't include major expenses.

On a 100 yr old duplex I have been talking about I averaged 18.5% on cleaning, maintenance, repairs and capex over a 20 yr period. This included almost no upfront repairs but was done over a long time frame starting with a deteriorated property and ending up with an attractive building.

Joel Owens · Answer

Quality of the tenants you inherit is one of the biggest key components not mentioned here.

You can have a brand new looking place and calculate that in but if you inherit tenants or get new tenants in that aren't good the building will get worn down over and over again.

I have seen  a brand new rehabbed unit get trashed in a months time from a bad tenant and the cost can be thousands to fix.So who you put in is as important as the repairs you make.

Also is this 9 unit all by itself or is there other buildings close by that are multifamily.If there are you might want to purchase those as well to control the look and feel of the area and deter crime.

You can keep your property pristine but if the people around you don't it will be hard to land good tenants and will affect your properties value going forward.

Thuy Pham-Satrappe · Answer

@Michael D. Thanks very much!

Thuy Pham-Satrappe · Answer

@Michael D. Given that this post was 7 years ago I'm curious how the numbers have panned out for you? I'm looking to purchase some older properties as well and have been wondering best practices for budgeting for maintenance and repairs as well

Thuy Pham-Satrappe · Answer

@Jeff S. This is very helpful thank you!

Account Closed · Answer

I say . . .
If you've got 9 units, some are probably in better shape than others.  Check out my awesome Inspection Report that I uploaded to the site today.  It's 17 pages long, which is very cumbersome, but you don't have to fill out all of the Qs. However, it will force you to look for and at items you wouldn't have thought of unless you're "rolling in the deep".  You need to gather data for each unit and then synthesize the data so you can make the highest and best use of both your working capital and your current product.

If you maintained at a minimum, reserves which equal 1 month's rent per unit, then that's a decent place to start.  However, at the end of the day, you need more liquid capital for unforseen events (which I've never been able to predict! ha!), and you should be fairly comfortable with 3-6 months' reserve per unit as well as GOOD INSURANCE!  It's also a good policy to make all of your tenants purchase renter's insurance, whether you force that premium into the built-in rent or they have to buy it on their own.  People are far less likely to make insurance claims against YOU when they have their own policies (which, of course, are limited).

Michael D. · Answer

Super, thanks Jeff, that's exactly what I was looking for.

Repair and maintenance budget on old property?

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