Want one thing to prevent surprise rental expenses?
Dreams.
New rental investors dream big. They dream of passive income. Financial freedom. Spending more time with family.
But there's one thing that trips up nearly every rookie landlord:
Major home repairs.
Major repairs like AC unit replacement, major roof repairs, or broken plumbing. These things come with 5-figure price tags. They can erase months of rental profits in a single expense.
Here's the good news.
Major home repairs don't have to cripple your rental business. Not if you have the proper budgeting strategy in place.
What you'll learn:
Why major repairs have the potential to cripple new investors
Exactly how much an AC unit replacement costs
The top rules for budgeting as a rental investor
How to build a repair fund that will cover any expense
How to avoid making the most expensive rookie mistakes
Why Every Rookie Investor Gets Bruised by Major Repairs
Wait, wait, wait…
Hold up for a minute.
New investors all do the same thing.
They sit down and budget for things like mortgage payments. Property taxes. Maybe insurance and property management fees if they're feeling generous.
But nobody wants to budget for…
The sky falling on their rental property.
Well, almost nobody.
Unless you're planning on your rental property literally falling from the sky, you need to plan for major home repairs.
And here's the #1 home repair that every rental investor dreads.
When the HVAC system goes out on a rental property.
There's no time to comparison shop when your tenant is melting away in the summer heat. They want that AC unit replaced ASAP. That means finding reliable HVAC and plumbing services in Kansas City is an urgent priority. An air conditioning unit replacement costs anywhere from $5,000 to $12,500, depending on a variety of factors like size and efficiency rating.
You've got to budget for it.
Plus… Another dark secret among real estate investors? Older properties often have older HVAC units. And HVAC systems aren't meant to last forever.
Energy Star recommends replacing any HVAC equipment that's been in service for 10 to 15 years. That includes heat pumps, boilers, central air conditioners, and more.
You do the math.
If a rental property has a 15-year-old HVAC system, you should expect to replace that system within the next couple of years.
And that is why major repairs are every rookie investor's worst nightmare.
How Much Does An AC Unit Replacement Really Cost?
Let's talk specifics.
Believe it or not, there's actually a handful of costs that go into replacing an AC unit. They include:
The cost of the AC unit itself. High-efficiency units cost more up front but they save you money on utility bills later on.
Labour costs. Installation will likely run you about 1/3 of the overall bill.
Repairing/fixing ductwork. Leaks and holes in ductwork is another major expense that could set you back thousands.
Building permits. They can range from free to a couple hundred bucks.
Needless to say…
When it comes to HVAC repairs and replacements, expect the costs to add up quickly.
Again, though.
An air conditioner replacement isn't just the price of a new AC unit. You have to plan for the ancillary costs as well.
3 Rules You Need To Follow When Budgeting for Repairs
Ok, so how much should you budget for major home repairs?
Well, it depends on who you ask.
You've got a handful of rules and regulations that most successful landlords follow. Here's a rundown of the most popular ones:
The 1% Rule
Save approximately 1% of your property's market value per year to cover repairs and maintenance costs. On a $250,000 rental home, you'd be budgeting $2,500 per year.
The Square Footage Rule
Budget $1 per square foot per year of your rental property. A 1,500 square foot rental would have an annual maintenance budget of $1,500.
The 50% Rule
Plan on spending 50% of your gross rental income on all operating costs. Including repairs, maintenance, property taxes, insurance, etc.
This one may take a bit of math, but it really helps you understand where your money's going each month.
Let's be honest…
There's no perfect budgeting system.
Each of these rules fail to account for something.
They don't take into consideration the age of your rental property.
A trick seasoned real estate investors have up their sleeves? Combine all three rules. And increase your repair budget if your rental home is older.
Start Building a Repair Fund (and Stick To It!)
Knowing how you should budget for repairs is only half the battle. Here's what you should do with that information:
Step 1: Open a dedicated savings account. This account should only accept funds for repair costs. Label it clearly.
Step 2: Immediately set aside funds from your rental income each month. $100? $200? Doesn't matter. Whatever you can swing will help immensely down the road.
$200 per month adds up to over $2,000 per year!
Step 3: Before you even buy a rental property, have every major system inspected.
You need to know how old the roof, water heater, HVAC system, and plumbing are before you buy. That way you have a realistic idea of how much longer the system has left in its lifespan.
Once you know that information, you can estimate how long it'll be before your next major repair.
Hint: AC unit replacements should be near the top of your list. They're one of the most expensive (and most common) repair items.
Easy-peasy.
Once you know how you want to budget for repairs and you have a dedicated savings account. It's just a matter of remembering to pay yourself first.
The 3 Worst Mistakes New Rental Investors Make
Some rookie mistakes are expensive. Others cost you thousands.
Don't make these avoidable mistakes yourself:
Never skip a property inspection. If you don't know the condition of every major system on your rental property before you buy, you're flying blind.
Invest in routine maintenance. Annual HVAC maintenance keeps your systems running longer. Don't skip it.
Never wait until your systems die to replace them. Plan your AC unit replacement for the spring or fall. You'll save money.
Always budget more than what you think you'll need. Costs always come in above budget. Don't fall victim to the same trap.
The number one mistake new investors make?
Thinking rental income covers expenses.
It doesn't. Not without sound money management and budgeting.
Budget for major home repairs. Pay yourself first. You'll thank yourself later.
Let's Recap...
Budgeting for home repairs and replacements is probably the single-most important lesson you can learn as a rental property owner.
Here's your quick rundown:
Prepare for the inevitable. At some point, major repairs will happen.
Know the condition of every major system before you buy. This can seriously affect your repair budget.
Follow the 1% rule. And the square footage rule. They're two of the best rules of thumb for budgeting.
Start a repair fund. Pay yourself first, and build your savings one paycheck at a time.
Don't be lazy. Know the condition of your property. Replace aging systems before they give out.
Profitable rental property owners know these secrets. And budget accordingly.
Don't be a rookie investor. Start building that repair fund today.
