Guide

How to build an annual budget for a rental property

A budget that omits vacancy and reserves will always look profitable and always be wrong.

The short answer

Budget with a realistic vacancy allowance, a maintenance reserve, an annual capital reserve per unit, and the fixed costs you actually pay — then judge the property on what is left, not on gross rent.

Overview

A budget that omits vacancy and reserves will always look profitable and always be wrong.

Why it works this way

Deals go wrong on the lines people leave out: vacancy, turnover, capital replacement. Rent minus mortgage is not cash flow.

Reserves are the difference between a bad month and a crisis. A roof or a compressor is not a surprise, it is a scheduled cost with an unknown date.

Do it in this order

1. Start from gross scheduled rent, not collected rent. 2. Subtract a vacancy allowance based on your actual turnover rate. 3. Budget maintenance as a percentage of rent, separate from capex. 4. Fund a capex reserve for roof, HVAC, and appliances by remaining useful life. 5. Include management fees, insurance, taxes, and turnover costs. 6. Review actuals against budget monthly, not annually.

Checklist

  • Start from gross scheduled rent, not collected rent.
  • Subtract a vacancy allowance based on your actual turnover rate.
  • Budget maintenance as a percentage of rent, separate from capex.
  • Fund a capex reserve for roof, HVAC, and appliances by remaining useful life.
  • Include management fees, insurance, taxes, and turnover costs.
  • Review actuals against budget monthly, not annually.
FAQ

Frequently asked

What vacancy rate should I assume?

Use local vacancy data for that submarket rather than a rule of thumb, and add turnover days you actually experience. Assuming full occupancy is the most common budgeting error.

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