That's an excellent question, and one that beginners often overlook when trying to assess their rental property cash flow. And the short answer is that there is no perfect figure, but here are some quick guidelines to help you decide how much should be set aside.
First, consider your fixed expenses. Do you pay $50 per month for lawn maintenance? Do you pay a pest control company? The monthly cost of these expenses is easy to budget for. Also, estimate any variable expenses that are recurring -- such as landlord-paid utilities.
Where it gets tricky is trying to budget for vacancies and maintenance.
Let's start with vacancies. I tend to budget 10% of the rental income from all of my rental units to cover vacancies. Your actual vacancy rate will fluctuate up and down, and there may be stretches where there are no vacancies at all. In my experience, 10% is a very conservative figure -- meaning that from a long-term perspective, it's generally sufficient to preserve your cash flow during periods of vacancy.
For maintenance, you can either use a flat rate, or you could try to tailor the figure to the condition of the property. A good starting point is still 10% of the rent, but I tend to go a little higher (say, 15%) when it comes to older properties. On the other hand, I've set aside as little as 5% of the rental income for properties that are just a couple of years old that have recently had a glowing inspection.
To sum it up, the amount you should be setting aside is a sufficient percentage of the rental income to cover your likely vacancy and maintenance expenses, plus enough to cover your fixed and predictable costs.
Here's an example: I own a triplex that brings in approximately $2,700 per month in rent. I pay the water bill, which usually runs about $150 per month, and I also pay $50 per month for lawn service. The property is about average, condition-wise, so 10% for maintenance and 10% for vacancies is sufficient. So, out of every month's rental income, I set aside $270 for vacancies and maintenance and another $200 for my fixed and predictable expenses, for a total of $470.
The bottom line is that there's no way to predict exactly how much maintenance your rental property will need or what percentage of the time it will sit vacant. So, the idea is to budget for these expenses along with the costs you can predict in order to ensure you won't have to come out of pocket when these expenses arise.
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