Budgeting for maintenance costs on an IP

[foal40]

Hi all, I was reading (on a different investing website) one of the endless comparisons between investing in property in Australia vs. buying shares. The timeframe was 10 years. The result came out pro shares (it was BWP shares specifically used in the comparison, not the share market in general), based largely on the high holding costs involved in IP ownership. One of the assumed annual costs in this specific comparison was that the IP in question would cost $10 000/year for maintenance. This was calculated at a "conservative" 2% of the purchase price per annum. I'm intrigued by this 2%.

I don't own my own home yet, let alone an investment property yet so I have no frame of reference other than the repairs that have been required on the property I currently rent (which is only a few years old and therefore bugger all).

Can anyone who has owned property for 10 years or more verify that 2% figure as a reasonable assumption?

I realise that an older house is probably going to have more issues than newer ones, so maybe that 2% is being averaged out over the assumed 10 year investment period? Should it be more or less? Or do experienced investors just put a set amount aside for repairs/maintenance on each property they own? According to the assumptions above, if you bought a $400 000 IP you should expect to pay $8000/year, every year, on fixing stuff! Does that sound reasonable to the experienced gurus out there?

 

[Brady]

You can't generalise. It would be specific to the property. You should make an allowance in your DD before you buy.

 

[Terry_w]

According to the assumptions above, if you bought a $400 000 IP you should expect to pay $8000/year, every year, on fixing stuff! Does that sound reasonable to the experienced gurus out there?

That seems way too high to me. A stove costs about $1000, a hotwater system about $1000. It woudl be a pretty major replacement of an item to cost $8k. and that wouldn't happen ever year.

I would allow for perhaps $1000 per year for a $400k property.

This should factor in carpets getting replaced every 10 years etc.

 

[wylie]

Wow! We don't spend anything like 2% of a property's value on maintenance. We wouldn't reach 0.5% without something major going wrong (this is for a $750K house).

I have not included painting as that isn't done annually, but we have just painted the house I'm using as a guide, and it is not finished, but will be about $8K all up (external). Even adding this in that comes to less than $1K averaged over ten years.

Of course, we have spent money on improvements, as opposed to maintenance, but that increases the value of the finished product (new deck, upgrade bathroom fittings etc).

 

[Propertunity]

I would allow for perhaps $1000 per year for a $400k property.
This should factor in carpets getting replaced every 10 years etc.

^ ^ this is also what I allow.....about $1K per property pa.
Some years an individual IP costs me nothing and in other years, another costs $2-3K for some major expense like a HWS. But it still averages out about $1K per IP per year. 2% in nuts IMO.

 

[HomePage]

Maybe that 2% estimate includes reno and rebuild costs over a long period of time ie. if you own a property for 20+ years you're likely going to have to do some major work over that time, especially if the property wasn't already new to start with.

 

[willair]

Can anyone who has owned property for 10 years or more verify that 2% figure as a reasonable assumption?

2% may be a bit in the low range,a simple random flood event and the insurance company does not pay would bump the 2 % scale real quick,
I think it would be too hard to put a number on it,sometimes everything run along without costing a cent the other times everything blows up within a few months..imho..

 

[bumskins]

^ ^ this is also what I allow.....about $1K per property pa.
Some years an individual IP costs me nothing and in other years, another costs $2-3K for some major expense like a HWS. But it still averages out about $1K per IP per year. 2% in nuts IMO.

Is that a house or unit? $1k / year must be a really cheap property?

 

[Redom]

Is that a house or unit? $1k / year must be a really cheap property?

Could just be a new property?

2% figure likely to include longer term holding costs (major repairs/improvements). As wylie mentioned, improvements increase the value of the asset - so i'm not sure they should be used for a 'shares v property' comparison.

 

[Propertunity]

Is that a house or unit? $1k / year must be a really cheap property?

Houses. The maintenance cost does not have a lot to do with the $ value of the property. It is the cost of a door lock, or a fly screen re-mesh, or a HWS replacement. These are much the same for a cheap house or a more expensive one.

 

[HomePage]

As wylie mentioned, improvements increase the value of the asset - so i'm not sure they should be used for a 'shares v property' comparison.

Sure it increase the value of the asset, but is it just restoring the building back to what it should be worth if it were newly built today or is it actually adding "new" value? If the former then it is recovering asset value, not increasing it.

 

[Brady]

Difference between Improvements & Repairs.

 

[wylie]

Sure it increase the value of the asset, but is it just restoring the building back to what it should be worth if it were newly built today or is it actually adding "new" value? If the former then it is recovering asset value, not increasing it.

Generally they are improving the value, ie. adding a deck, updating a kitchens (less so than the deck). Replacing a HWS is not adding value but adding a deck, or adding an ensuite is.

I've just looked at what we spent on two old timber queenslanders this year. Both happen to have needed HWS replaced, and one had a fence line cleared and half a fence paid for.

Both still came in (including all other costs, yard mowing, pest treatments, new vanity for one, new HWS for both) at less than 1% of each property's value.

 

[EN710]

If it's old, budget for emergency as well. Example for mine
Last financial year repairs ~ $5-6k, for new hot water system, new gas pipeline (it was old and leaking), blocked pipes, broken concrete step, leaking laundry etc etc

This year ~ replace the entire gutter ~ 2.8K, hopefully nothing more!

Probably will even out to low $$ after years owning it. Hopefully.

 

[Of The Vultures]

2% of the property value is excessive. It's got more to do with the age of the property than its value. For example both my Rocky properties are around 40 years old and maintenance for each nudges the $2000 per year mark, give or take.

Other properties that we've renovated have much lower annual maintenance costs.

 

[Ace in the Hole]

2% sounds a bit ridiculous, but it does come down to the types of properties we are talking about.

For the last 2 years, our entire stable of properties in the 8 figures would have cost way less than say 5k/annum for all misc repairs and maintenance, which includes regular lawn mowing/gardening.
That's a whole 0.05%, which is 2.5% of 2% !!!

Maybe we've just been lucky