Estimating cash flow for a rental property involves making assumptions about income and expenses. While predicting income can be relatively simple, expenses might feel more elusive. Many people wonder if there’s a reliable rule of thumb for estimating operating costs. Although no one-size-fits-all formula exists, we can offer some clever methods to help you assess maintenance expenses more accurately.
Section 1: Ineffective Methods for Calculating Operating Costs
There are numerous ideas about how to account for expenses on a rental property, but some common practices fall short. For instance, some suggest allocating 10% of the rental cost for maintenance. However, this approach is flawed because maintenance costs don’t correlate with rent. The expense of replacing a water heater is virtually the same for a $2,000 rental as it is for a $4,500 one. Although the latter may have more costly initial finishes, their ongoing maintenance isn’t significantly different. Hence, using rent percentages as a guideline for operating costs is generally unhelpful.
Section 2: A Better Approach to Predicting Operating Costs
Some investors attempt to estimate maintenance costs using a dollar-per-square-foot measure. While this approach might provide a closer approximation, it can still be problematic, particularly for larger homes. Instead, the factors that truly influence maintenance expenses include:
- The home’s age
- The type and condition of its mechanical systems
- The number of bathrooms (as they have more electrical and plumbing components compared to bedrooms)
- The current age of long-lived items like the roof, windows, and siding. If they are close to 25 to 30 years old, the cost of repair goes to the roof. It is time to update and replace them ASAP.
Although these expenses are difficult to predict, property owners should keep them in mind when evaluating maintenance costs.
Section 3: Overlooked Expenses and the Importance of “Sweat Equity Withdrawal”
Property owners may forget to include certain expenses in their calculations, such as tasks they perform themselves. Activities like lawn mowing, gardening, and other maintenance work have associated costs. It’s crucial to remember that no one will do these jobs for free. When owners take care of these tasks, we often refer to it as “sweat equity withdrawal.” Regardless of who does the work, it’s not free, and these expenses should be factored into the overall calculations.
Conclusion: Single-family homes present unique repair risks, and there isn’t a standard rule of thumb for estimating costs. Instead, property owners should evaluate their specific property and make informed judgments about its current condition to better predict operating costs.
If you enjoyed this content and would like to receive more like it, please send us an email at info@TheSFPropertyManagement.com. We’ll add you to our mailing list.
Please check out our blog page for more content: https://www.thesfpropertymanagement.com/blog/
TheSFPropertyManagement is a full-service property management company that specializes in residential single-family and multi-family properties in the San Francisco Bay Area. If you are a tenant searching for an apartment, please contact TheSFPropertyManagement today at 415-712-0507 to discover the available options that best suit your needs. Similarly, if you are a homeowner seeking a property management company to take care of your property, kindly contact us for assistance.
