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Predicting the annual cost of home maintenance on your rental property will allow you to plan for expenses and ensure that there are fewer surprises in store.

How to Predict a Property’s Annual Cost of Maintenance

Predicting the annual cost of home maintenance will allow you to plan for expenses and ensure that there are fewer surprises in the future. Maintenance is critical because it prevents more expensive repairs and replacements down the line. 

If you are unfamiliar with your property, you should begin by inspecting any major appliances and house systems, including your heating and cooling units, insulation, roof, and hot water heater. It’s also helpful to understand the current state of your electrical, water, and sewer systems. If you recently purchased the property and had a professional inspection, you can find much of this information in their report.

Factors that impact the annual cost of maintenance

Your annual maintenance costs will vary depending on the current age and condition of the property. It’s common for a single-family home to require more maintenance than a condo or apartment that may have an HOA. In some cases, the HOA may be responsible for some maintenance. If this is the case, be sure you are familiar with any fees or costs associated with their maintenance. 

The location of your rental property will also impact the annual maintenance cost. You can expect more maintenance for homes in very cold climates (consistently below 20 degrees) or if you receive significant snowfall. Similarly, homes in humid climates or areas that receive lots of rain will likely need additional maintenance to combat mold and mildew. Frequent rain can also impact the roof and require more frequent siding repair or tree removal.

Carefully consider all of these factors as you calculate annual maintenance costs and plan for expenses. 

The Annual Maintenance Checklist for Rental Homes in California

The Annual Maintenance Checklist for Rental Homes in Florida

The Annual Maintenance Checklist for Rental Homes in Washington State

How to estimate rental property maintenance

Several calculations can help homeowners predict their maintenance costs. Keep in mind that these formulas should be used only as an estimate.

The 50% maintenance rule suggests that homeowners should allocate half of their rental income, or mortgage, for repairs, maintenance, taxes, and insurance. If you already know your tax and insurance costs, you can quickly determine what remaining amount to attribute to maintenance costs. We recommend using this calculation against one of the other formulas to verify your estimate.  

You can also use the square footage of your home as an indicator of your annual maintenance costs. If you use this rule, you should start by estimating $1 per square foot for yearly maintenance costs. If you have a 2,000-square-foot house, your annual maintenance estimate would be $2,000. This estimate may not include yard maintenance, tree removal or care, or snow removal. Likewise, this rule does not account for significant repairs that may be needed. 

If you use the 1% maintenance rule, you will plan that maintenance costs for the year will equal 1% of the property value. For example, if your home is valued at $500,000, your annual maintenance costs will be $5,000. If you use the 1% rule to estimate your maintenance expenses, keep in mind that it does not include any major repairs or replacements. 

The 1% rule can be a helpful maintenance cost indicator because as home values increase and inflation continues to rise, you can expect maintenance costs to increase. While we’ve been using the 1% rule for some time, it’s wise to consider saving closer to 2-5% of your property value, depending on your property’s age, condition, and location. 

Average costs of common rental property maintenance

To accurately predict your annual maintenance cost, you should use a combination of calculations. Consider using a formula and comparing it against the actual costs of routine maintenance. 

Routine maintenance costs (every few weeks or months)

Routine maintenance costs should include any expenses you expect to incur on a regular or semi-regular basis. Keep in mind that some maintenance may only be seasonal. You may need to plan for yard maintenance in the summer and snow removal in the winter. 

You should expect homes to require minor repairs on a semi-regular basis. Things break, and you’ll be less frustrated if you have planned for these repairs, even if you can’t plan which things might need repairs. If you can make these minor repairs yourself, you’ll likely save money on annual maintenance. Likewise, a responsive, reliable handyperson can save you many headaches and additional costs. 

Leaky faucets or toilets: $150-$400/each 

Appliance repairs - washer/dryer, refrigerator: $100-$400/each 

Major maintenance and replacement costs 

Major repairs and maintenance costs can be extremely expensive and cause homeowners significant difficulty. Almost all homeowners will experience a considerable maintenance cost at some point. However, if you assess the current state of your home systems and appliances, you’ll better understand which expenses might arise in the future. As you evaluate your home, you can keep these costs under consideration. 

Sewer line or septic tank replacements: $5,000-$15,000

After you’ve evaluated the current condition of your home, you can plan for additional expenses that are likely to occur in the future. For example, if your hot water heater is ten years old, it’s prudent to begin setting aside money for a replacement. 

Every system in your home has an expected life expectancy. With regular maintenance, you can extend the life of these systems. However, these things will ultimately need to be repaired or replaced. You can expect the exterior paint on a home to last anywhere from four to six years. HVAC systems can last 10-20 years, depending on the climate. The AC may need to be replaced sooner in warmer climates where the system runs more frequently. A traditional water heater has a lifespan of 8-12 years, and a tankless water heater will last 20-25 years. 

The roof of your home is one of the most expensive items to replace. Each type of roof will last for a different duration. It’s critical to familiarize yourself with the kind of roof you have and its current condition. Roofs will generally remain in good condition for 12-25 years. 

Many of us are now spending more time at home, and many may still work from home, either part-time or full-time. As a result, you can expect more wear and tear on a home. 

Understand how capitalization rates (or cap rates) are calculated to identify the best methods for assessing a potential rental property investment.

Capitalization Rate: What It Is and How To Calculate It

The capitalization rate is one of many ways to evaluate a potential investment property. Still, it’s critical to understand how capitalization or cap rates are calculated and their limitations. With a better understanding of calculations like cap rates, you can identify the best methods for assessing a potential rental property. 

Capitalization rates compare and estimate the future return on investment or ROI of one or more real estate properties. Cap rates for residential and commercial real estate are expressed as a percentage. They’re a popular tool because they help individuals estimate the potential return on real estate investments. 

Capitalization rates measure the potential yield of a specific real estate property over one year, assuming that the property is not financed. You can also think of cap rates as the percentage rate of return, either a loss or gain, of a specific property based on the income it generates, minus expenses. 

How do you calculate the capitalization rate of a property? There are two methods or formulas that are used to calculate capitalization rates. 

Most real estate investors will use the calculation which divides the net operating income by the property’s current market value. This calculation can be expressed using this formula:

Capitalization Rate = Net Operating Income / Current Market Value

In this calculation, the net operating income equals the estimated annual income minus expenses like maintenance, property management, and property taxes. This formula is most popular because it compares the projected income of a property against the current market value. 

The second formula used to calculate capitalization rates differs because it compares net operating income against the property’s purchase price. 

Capitalization Rate = Net Operating Income / Purchase Price

This formula puts more emphasis on the acquisition cost of a specific property, as opposed to the current value of a property. While there is no drawback to using this formula at the time of purchase, it’s not ideal for properties purchased months or years prior. Using the purchase price from several months or years ago will incorrectly estimate a property’s potential return. Similarly, this formula works poorly for homes that have been inherited because the purchase price is zero. As a result, using this formula can result in unrealistic expectations. 

To estimate the net operating income of a property, you will need to calculate the annual rent by multiplying the monthly rent by twelve. Once you have calculated the annual rent, you will need to subtract expenses. Expenses should include taxes, utilities (if not paid by the resident), property and liability insurance, and maintenance. 

If you are unsure of the monthly rent, we recommend that you research similar properties in the same area. You’ll need to look for other properties that have similar amenities. Identifying several similar properties will help you accurately estimate your monthly rent for a property. 

Why don’t the capitalization rate formulas account for financing 

Capitalization rates do not account for property acquisition costs like interest and closing costs for a very specific reason. The cost of acquiring a property will vary significantly depending on current interest rates, type of loan, and your particular closing costs. While other formulas can account for these costs, capitalization rates are designed to provide a baseline rate of return, regardless of loan repayment or interest rates. Excluding acquisition costs ensures that investors compare potential properties based on possible returns without factoring in highly variable costs unique to each individual. 

When you shouldn’t use capitalization rates to assess real estate properties 

You should not use capitalization rates to evaluate a property if you plan to use the property as a vacation or short-term rental. The potential income, occupancy, and expenses are too variable to assess a property accurately. 

While capitalization rates are a helpful tool, they have limitations that can be illustrated using two hypothetical properties. Let’s imagine that the first property has a net operating income of $50,000 and the current market value of the property is $600,000. In this example, the capitalization rate is 8%. 

Property #1 = ($50,000 / $600,000) x 100% = 8%

In the second example, a property has a net operating income of $40,000 and is currently valued at $400,000. The capitalization rate for this property is 10%. 

Property #2 = ($40,000 / $400,000) x 100% = 10%

If you only consider capitalization rates, the second property is the better investment. However, each investment opportunity has unique characteristics that should be considered. While the second property has a better capitalization rate on paper, it could be located in a less desirable location or have fewer amenities. As a result, the first property might be a better investment, even if it has a lower cap rate. 

How to use capitalization rates to your benefit 

Capitalization rates are one tool for gathering information and comparing potential rental properties. Individuals can identify the best investment for their financial picture and goals with more details. 

When calculated correctly, capitalization rates can indicate the length of time needed to recover the amount invested into the property. For example, a cap rate of 10% will require around ten years to recover the amount invested in the property. 

Understanding what constitutes a ‘good’ cap rate

It may be tempting to look for a potential investment property with “good cap rates.” However, it’s essential to understand that capitalization rates are not evaluated as good or bad but rather as an expression of potential risk.

A higher capitalization rate corresponds to more risk, and a lower cap rate is associated with less risk. Your ideal cap rate will depend on how much risk you’re comfortable taking. Generally, capitalization rates will fall somewhere between 4% and 10%.

You should assess capitalization rates in the context of the specific property and the current real estate market. As a general rule, you can expect capitalization rates to increase whenever interest rates rise. An increase in interest and capitalization rates will significantly impact anyone who owns a rental property. 

All things being equal, a lower cap rate equates to a better valuation and a better prospect of returns with less risk. Conversely, a higher cap rate will likely result in a relatively lower ROI and a higher level of risk. 

In real estate, properties are rarely equal. One property may generate more rental income but has more maintenance costs and higher taxes. Ideally, you want to identify a property with a reasonable cap rate relative to the amount of risk in purchasing a specific property.

How Belong supports the success of your real estate investments

A successful real estate investment strategy requires you to identify the ideal property, maintain a positive cash flow, and manage the investment effectively. Belong helps homeowners increase their profits and limit the hassles of owning an investment property.

When it’s time to price your property, Belong uses data and real-time insights to help you maximize cash flow. We also offer guaranteed rent, which means you never worry about less than 100% occupancy, which helps keep your investment safe. 

Learn more about Belong and see its role in your real estate investment strategy.

Understand how cap rates are calculated to identify the best methods for assessing a potential rental property investment.

Understanding how to implement and calculate prorated rent in your rental home can help ensure you maintain a positive cash flow between leases.

What is Prorated Rent and How to Calculate it

Understanding how to implement and calculate prorated rent will allow you to lease your rental property to ideal residents and ensure you maintain a positive cash flow between leases. 

Prorated rents allow you to rent your property to a new and existing resident for a period less than your typical lease term of a month. Depending on your unique circumstances, you may have a resident who wants to move in on a day other than the first of the month. Similarly, residents may move out before the end of the month or need a few additional days or weeks before they move out. Prorated rent is rent that is calculated proportionately to the monthly rental amount.  

Prorated rent is equal to the daily rental rate multiplied by the number of days the residents will rent your property outside the current lease terms. 

Prorated rent = Daily rental rate x Number of days

You can calculate the daily rental rate by dividing the monthly or yearly rent by the number of days in the month or year. When you calculate the daily rental rate, there are four methods you can choose from. 

Daily rental rate based on the current month: Calculate the prorated rent by dividing the number of days in the month by the monthly rent and multiplying it by the number of days in the prorated rental period. 

Daily rental rate based on the average month: The average month has 30.42 days. To calculate prorated rent using the average month, divide the monthly rent by 30.42 and multiply it by the dates included in the prorate rent period.    

Daily rental rate based on the banker’s month: To calculate the daily rental rate using a banker’s month, calculate the prorated rent using 30 days in a month. Use 30 days regardless of how many days are in the month you are charging prorated rent. 

Daily rental rate based on the number of days in a year: Instead of calculating based on the days in a month, calculate the daily rental rate using the number of days in the year and the annual lease amount. To do this, multiply the monthly rent by twelve to find the yearly rent amount. Divide the annual rent by the number of days in the year (365 unless it’s a leap year) to find the daily rental rate.

Once you’ve chosen a method and identified the daily rental rate, you can multiply that rate by the days the residents will rent the property to find the prorated rent amount. 

Let’s imagine the monthly rent for your investment property is $2,000, and you have a resident who would like to move in 10 days before the beginning of their new lease. We can calculate the prorated rent amount using the formula above and our chosen method of finding the daily rental rate. Let’s assume that the current month is February, which is not a leap year. 

Prorated rent using the current month’s daily rental rate in February: 

$2,000 monthly rent /29 days = $68.97/day x 10 days = $689.70 

Prorated rent using the average month daily rental rate: 

$2,000 monthly rent /30.42 days = $65.75/day x 10 days = $657.50 

Prorated rent using the banker’s month (30 days) daily rental rate:

$2,000 monthly rent /30 days = $66.67/day x 10 days = $666.70 

Prorated rent calculated based on yearly rent: 

Depending on your method, you can see a slight difference in the prorated rent amount. There’s no wrong way to calculate the daily rental rate, but it is critical to use the same method consistently. This will allow you to answer any questions your residents may have about the prorated rental amount. 

There are two main situations where it is appropriate to use prorated rent. In both cases, prorated rent can aid in creating a smooth rental transition. 

When a resident moves in mid-month, let’s say your last resident moves out, and it takes you several weeks to find a new resident. They may move in on the 18th instead of waiting until the 1st of the following month. In this case, you’ll want to charge prorated rent from the 18th to the end of the month. 

Alternatively, when a resident wants to move out two weeks after the end of their year-long lease, imagine you have a resident who would like to move out on January 14th instead of December 31st. If you agree with their request, you will charge prorated rent from January 1st to January 14th. In this example, you would charge the prorated amount at the beginning of the last month. 

If you offer prorated rent when a resident moves in, consider charging the first month’s rent plus the prorated rent. You can collect this amount before your new resident moves in. Once the next month, charge rent as outlined in the lease agreement. 

Suppose you are charging prorated rent when your resident moves out. In that case, you can charge prorated rent at the same time and in the same manner as you typically collect rent once you’ve calculated the amount. 

Should you include prorated rent in your lease agreements? 

It can be helpful to outline in what situations and how you will charge prorated rent in your lease agreement. Ultimately, the goal is to communicate the process with your residents, so there is no confusion when these situations arise. 

Make it straightforward for your residents to understand how prorated rent works. Remember that they may not be familiar with prorated rent or know precisely how it works. Simple, proactive communication can have a positive outcome for everyone. 

As always, you should work with an attorney to ensure your lease meets local requirements and effectively communicates expectations to your residents. 

How prorated rent can help you find new residents 

Prorated rent can be a helpful tool in attracting new residents to your rental property. If you can offer potential residents flexibility using prorated rent, you can encourage a high-quality resident to choose your property over another. Similarly, a positive move-in experience which may include prorated rent is a good way to retain excellent, respectful residents.

If you're in the market for investment property, learn about financing, credit scores, and how to choose the best mortgage lender for an investment property.

How to Choose a Lender When You Want to Buy an Investment Property

In preparation for choosing a lender for your investment property, you’ll need to familiarize yourself with loan qualifications and underwriting requirements and decide which factors to consider when choosing a lender. With some preparation, you can position yourself as an ideal candidate for lenders and be prepared to present the best offer when you find your investment property of choice.

What to know about financing an investment property 

If you are financing a rental property investment for the first time, it’s critical to understand that it will be more challenging to qualify for an investment property loan. Lenders consider real estate investment loans to be higher risk than loans for primary residents.

If you want to make the qualifying process more manageable, familiarize yourself with the underwriting standards used for investment property financing. In general, you’ll need to show that you can afford your existing mortgage and the monthly loan payments on an investment property. Underwriters will also consider your down payment amount, credit scores, and debt-to-income ratio and evaluate your current savings.  

Down payments for investment properties 

Real estate investors should expect to make a larger down payment than they might have with their primary residence. When purchasing a primary home, you may have qualified for a loan with as low as zero to 3% down. In contrast, you should expect lenders to ask for a larger down payment, often between 20% and 35%. A larger down payment will also help you secure better terms for your loan. 

As with a residential mortgage, lenders will use your credit score as a determining factor in the loan pre-approval and underwriting process. While everyone’s circumstances are different, lenders typically like to see a minimum credit score of 680. If you have a credit score at or above 740, you can expect better interest rates for your investment property loan. 

The loan underwriter for your investment property lender will use DTI to evaluate your future ability to repay your loan. DTI is calculated by measuring the percent of your monthly income that goes toward paying off debt. If you currently have a mortgage, car payment, or student loan, those debt payments will limit the amount of money your lender will be willing to offer you for an investment property loan. 

Ideally, you want a DTI that falls between 36% and 45% to qualify for a rental property mortgage. Remember that future rental income is not factored into the debt-to-income (DTI) calculations. 

In addition to reviewing your down payment, credit score, and DTI, underwriters will look to see if you have enough money in savings to cover 3-6 months of mortgage payments. Mortgage payments include the loan principal, interest, taxes, and insurance. The more savings you have access to, the more likely a lender will approve your investment property loan.

Additional underwriting requirements for real estate investment financing

In some cases, loan underwriters will ask for additional documentation for investment property financing. 

Additional underwriting requirements for investment properties can include:

Documentation that you are buying the property for business or investment purposes

Operating agreement for your business entity, if applicable 

Lease agreement (if the property already has a tenant in place)

We encourage you to discuss these requirements with your real estate agent and potential lenders. Understanding what you need for underwriting can help you be more prepared and quickly act on opportunities. 

How to Compare Mortgage Lenders for an Investment Property 

Once you have a clear idea of what factors will influence the pre-approval and underwriting process, you can begin to compare potential lenders. Finding the right lender will help eliminate headaches as you progress through the process and can ensure you make financially sound and advantageous decisions. 

Types of investment property loans a lender underwrites

As you begin your research into potential lenders, you’ll need to ensure that any potential lenders will underwrite your chosen type of loan. Not every lender will underwrite every kind of loan. Carefully research each lender's loan options, terms, and rates before moving forward. 

Down payment requirements will vary depending on the loan type but can also vary from lender to lender. Even with a seemingly similar loan, the down payment requirements can differ vastly. Carefully even with a similar loan review all the details to ensure that you compare loans accurately. 

For example, one loan may offer a lower down payment, but the interest rate will be higher. Depending on the particulars of your financial situation, you can choose a set of terms that will help you best meet your financial goals. 

Interest rates for your investment property loan will vary from lender to lender. Remember that it’s not enough to compare interest rates outright. You also need to carefully consider the terms of each loan to ensure that you are comparing loans apples to apples. With so much information, it can be overwhelming. Take your time to evaluate each lender, loan, and terms carefully. 

When choosing a lender for your investment property loan, you may also need to assess the lenders based on the minimum and maximum funding limits. These limits indicate the minimum or maximum amount of money the lender will offer to loan you if you qualify. Funding limits will be critical if you want to purchase a real estate investment in a higher-priced market.

Complexity of the lender’s underwriting process 

Finally, you should evaluate the underwriting process of each lender for its difficulty and complexity. If you have a shorter timeline for your real estate investment purchase, it may be advantageous to work with a lender who can expedite the process. If you plan to purchase an investment property in a competitive market, it may be helpful to have a lender with a smooth, efficient underwriting process. Sometimes, the more quickly you can close, the more competitive your offer will be. 

Discuss the underwriting process with your lender and your real estate agent for an ideal outcome. In some cases, there may be aspects of the underwriting process that you can begin before identifying a property. 

After you’ve found a lender for your investment property, consider Belong

Your real estate agent and lender are critical professionals who will aid you in purchasing an investment property. Once you’ve purchased and financed your investment property, you can consider what other professionals will best support your new investment. 

Belong offers you an opportunity to increase the return and limit hassles related to your new investment property. We help you price your rental home for maximum cash flow and can guarantee rental payments. When the time comes to find tenants, we attract, screen, and retain residents who will value your new property as much as you do. Finally, we assist with any maintenance or repairs that you might need. 

If you have a new investment property or want to do the maths before you commit, check out our back-of-the-napkin calculator to do some quick sums on how Belong can support your real estate investment strategy. 

Jordan Newsom

Jordan Newsom is a highly-caffeinated writer who loves delighting readers, using content to teach, and broadening perspectives. When she's not behind a computer screen, she's hunting down the best coffee shops, breweries, and restaurant patios in Denver, Colorado.

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