A common rule of thumb, the “1% rule,” says that homeowners should expect to spend roughly 1% of a property’s purchase price on maintenance annually. But is that estimate realistic for the metro Detroit market? We did a deep dive into the data from our 600+ unit portfolio to find out.
On average, Castle customers spend roughly $150 on maintenance per property per month, or $1,800 annually. While we don’t know the purchase price for every property under our management, some quick back-of-hand math gives us an estimate of ~$60,000. (Roughly speaking, 50% of our properties are in Detroit, where the average purchase price is ~$45,000; 30% in lower-priced suburbs with an average purchase price of ~$60,000, and 20% in mid-price suburbs with an average purchase price of ~$100,000.)
If that’s the case, then Castle customers are spending almost 3% of purchase price on maintenance annually. Why does the 1% rule not hold in Detroit? We believe there are a few reasons:
- Low purchase prices: While maintenance spend can be expected to scale with purchase price to some extent, there’s a floor to how low those expenses can go. 1% may be realistic for a $200,000 house, but it’s almost certainly not realistic for a $40,000 one.
- Property age: Properties in the Detroit metro area are generally around 80 years old, and most of our customers are not bringing on properties that have been completely rehabbed. Unsurprisingly, older properties are prone to more issues and more often have deferred maintenance.
- Tenant occupancy: The 1% rule is most commonly cited for homeowners, not investors. While it’s rare for a tenant to completely trash a house, it’s an unfortunate truth that tenants often don’t treat a property quite as nicely as the homeowner would. Additionally, in between tenancies, landlords will often make a property more appealing to future tenants by choosing to fix minor issues that a homeowner might ignore.
- Other expenses: Rental owners typically encounter a few other expenses that Castle categorizes as maintenance, but that may not be included in the 1% rule: vacancy-related upkeep like lawn care, snow removal, and cleaning a property in-between tenancies. It’s easy to forget about these expenses, but they’re important for investors to keep in mind when budgeting.
Failing to budget enough for maintenance is one of the most common mistakes we see new investors make. Avoid unpleasant surprises by keeping maintenance and upkeep in mind when planning for your investments.