Posted by By Paul Branton, Director of Investor Services for Home Rental Services
Owning a rental investment property is often referred to as “passive income”, but any experienced investor knows that while rental properties can generate cash flow and long-term wealth, they also come with real expenses… The cost of doing business.
Two of the most significant—and often underestimated—are repairs and tenant turnover costs. Understanding and budgeting for these business expenses is critical to long-term success with your rental investment properties.
Why Repairs Are Inevitable:
It’s a plain and simple fact that every home out there requires upkeep. Regardless of having excellent tenants or more durable, lower maintenance finishes, systems and materials wear out over time.
Here are just a few examples:
- Appliances – Refrigerators last around 10 years and dishwashers seem to be closer to 7yrs.
- HVAC Systems – Furnaces and AC units average 12-18 years with proper care.
- Water Heaters – Usually need replacing every 8-12 years.
- Roofing – Depending on material, roofs may last 20–30 years.
Beyond these big-ticket items, there are also those “fun” day-to-day repair calls: leaky faucets, toilets and showers, broken garbage disposals, clogged drains, or electrical issues. These aren’t if expenses—they’re when expenses. We all know this and yet we often neglect to set aside the funds to prepare for these when moments.
Yet another “when” moment is tenant turnover. With the national average tenancy hovering between 3-4 years for single family homes, turnover hits you with some hefty direct and indirect costs. The combination of vacancy and work needing done to attract those new tenants will likely end up costing the equivalent of one to two months of rent per year leased.
With that in mind, here are some “rules” to consider when creating a budget:
Method | Budget Range | Best For | Notes |
|---|---|---|---|
| 1% Rule | 1% of property value per year | CapEx & Annual Maintenance | Example: $450,000 home → budget $4,500/year |
| 5% of Rule | 5% of annual gross rent | CapEx Budget | Example: $2,500/month rent → $1,500/year |
| 10% of Rule | 10% of annual gross rent | Annual Maintenance | Example: $2,500/month rent → $3,000/year |
| Square Foot Rule | $1–$2 per square foot per year | $1 = Annual Maintenance $2 = CapEx & Annual Maintenance | 2,500 sq. ft. home → $2,500–$5,000/year |
To further demonstrate what this looks like, here is an example budget for a $2,500/m property:
- Monthly Rent Collected: $2,500
- Annual Gross Rent: $30,000
Reserves to Set Aside Each Year:
- Maintenance Fund (10% of gross rent): $3,000 ($250/m)
- Capital Expenditure Fund (5% of gross rent): $1,500 ($125/m)
- Turnover Fund (One month’s rent): $2,500 ($208/m)
Total Annual Reserves: $7,000
By setting aside $583/month you’ll be much better positioned and prepared for these expenses when they arise. Instead of having expenses be a “surprise”, let’s make them a known quantity and be prepared with reserves on hand.
Why This Matters:
In addition to properly maintaining your investment property, there is a direct correlation with tenant satisfaction related to maintenance and length of tenancy. Failing to budget for and respond timely to repairs can turn property ownership into a more stressful and costly experience for all parties involved. Consistent budgeting and timely maintenance keep your rent and tenants stable, which helps your investment performance at its best over the long haul. So don’t just try to “fudge-it” – have a realistic budget.
TLDR (Too long, didn’t read) Summary:
Investment property income isn’t just about collecting rent—it’s about managing the expenses that come with properly maintaining a safe, desirable home. By proactively budgeting for repairs and turnover, investors protect both their property and their bottom line.
If you’d like help with determining what a realistic budget looks like for your property(s), give me a shout!
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