Sensible Perspectives

Are You Saving Enough To Maintain Your Home?

Posted by on June 15, 2018

If you own your home, you’re the de facto property manager. Your job is to maintain your property and replace its various components as they depreciate. As the property manager, you must both hire professionals to do the maintenance and pay them for their (hopefully) excellent work.[1] [2]

Being a property manager can be a demanding job. Understanding the various components of your home, how much they cost and how often they require maintenance or replacement is a big task. In what follows, I’ll discuss how you can both estimate and plan for your ongoing major home maintenance expenses. With nothing more than an estimate of the replacement cost of your home, you can create an effective plan for covering major home maintenance expenses over the lifetime of your home. When your boiler kicks the bucket and you’ve already set aside the cash to replace it, you’ll feel prepared, not blindsided!

Your Home is Complex

Your home is unlike any other asset or liability on your lifetime balance sheet. Its fair market value can appreciate or depreciate like a stock, it pays you an “imputed rental dividend” every month like a bond,[3] and it requires ongoing outlays on maintenance, insurance premiums and taxes like your car.

Your Home is Expensive

On top of the down payment and monthly principal payment on your mortgage, you must pay property taxes, homeowner’s insurance premiums, mortgage interest, utilities, and ongoing minor and major maintenance expenses. Excluding mortgage interest, these operating expenses can easily amount to 3-5% of your home’s fair market value each year.

Except for major home maintenance, these operating expenses are straightforward, typically paid annually and easy to budget for. If you have a mortgage, the interest payment on your home loan is calculated as a percentage of the outstanding loan balance (see my articles on prepaying your mortgage here and here). Your property tax is a fixed percentage of the home’s assessed value (about 1% in Boston) and your homeowner’s insurance, utilities and minor maintenance (e.g., snow removal, lawn care, interior cleaning, handyperson and other service contracts) are rather smooth year-to-year.

Your Home is Depreciating

Every year that goes by brings each component of your home one year closer to its life expectancy. Because your home is composed of hundreds of components, each with its own expected life and replacement cost, major home maintenance expenses can be complicated to budget for. Before outlining a budgeting strategy, let’s review how to value the components of your home and how they depreciate.

You can estimate the value of your home’s components, or any insured property, using two methods: actual cash value (ACV) or replacement cost value (RCV). The difference between the property’s RCV and ACV is the property’s accumulated depreciation.

Accumulated Depreciation = Replacement Cost Value – Actual Cash Value

The ACV is the market (or resale) value of the property. It’s what a buyer would be willing to pay for your property today. If the property is a highly depreciated “fixer upper” the amount a buyer would be willing to pay (the ACV) is much less than if the property were brand new (the RCV). The RCV is what you, as the owner, would need to pay to replace the property with something new at current market prices. As a homeowner, RCV is what matters.

One way to approximate the accumulated depreciation of your property is to consider its age and life expectancy at purchase. If your new $2,000 refrigerator is expected to last 10 years, an estimate of its annual depreciation rate is 1/10 or 10%. Each year the ACV of your refrigerator will decline by 10% of its original purchase price (the RCV). This means after 6 years the accumulated depreciation will be approximately $1,200 ($2,000 x 6 years x 10%) and the ACV will be $800 ($2,000 – $1,200).[4]

How to Budget for Major Home Maintenance

If you were to estimate the accumulated depreciation for every component of your home individually, you could devise rather precise targets for how much to budget each year for major home maintenance expenses. However, collecting information on the replacement cost, age and life expectancy for every major component of your home is a daunting task![5]

A much simpler, yet equally effective, approach is to estimate the average accumulated depreciation for all components collectively over the lifetime of your home. To implement this method, you will need:

  1. an estimate of the total replacement cost value for your home and
  2. an estimate of the average depreciation rate for your home’s components.

The first item is straightforward. Simply look at the “dwelling coverage” on your homeowner’s insurance policy.[6] This is the amount of money that your insurer would compensate you for the total loss of your home and is based on an estimate of the total cost (materials, labor and equipment) of replacing all the components of your home. Note that the replacement cost of your home, and therefore the dwelling coverage, can be a good deal lower than the property’s fair market value. This is because a large share of the property’s value is associated with the land, which doesn’t depreciate like the dwelling.

For the second item, you will need data on the replacement cost and life expectancies for the components of your home. Let me take a stab at this for you! Figure 1 compiles data on the replacement cost and life expectancies for the components of a representative home.[7] The total estimated replacement cost value for all the components of this home are about $450,000. The ten most expensive components make up over 70% of the total. These are the framing, foundation, exterior finish, roofing, finish carpentry, interior finish, plumbing rough-in, flooring, painting, and wiring. Figure 1 illustrates the difficulty in budgeting for major home maintenance expenses. Some components last 10 years while others last 100. Some components cost $3,000 to replace while others cost $30,000. 

Figure 1. Life expectancy and replacement cost for primary components of your home

saving enough maintain home

Source: Craftsman National Building Cost Manual, International Association of Certified Home Inspectors

In estimating an average depreciation rate for your home, it’s important to put more weight on rates for components that are more expensive to replace, and vice-versa.[8] Based on the Figure 1 data, and using the above framework, a good estimate for the average annual depreciation rate for a representative home is 3%. For a home with a total replacement cost value of $450,000 this implies, on average, annual major maintenance spending of about $13,500 a year (3% x $450,000 = $13,500) over the lifetime of the home.

As with any savings plan, the goal is to put aside money today so it will be available to spend tomorrow. This is particularly important for major home maintenance expenses, which can be large and infrequent. To create your own major home maintenance budget, you should start by putting aside 3% of your home’s replacement cost value every year. If you’re expecting a cluster of major maintenance expenses in the next several years, you should frontload your savings by putting aside more for the first several years—the more accumulated depreciation, the more you need to frontload. As you need to refurbish or replace major components of your home simply withdraw the funds from your savings. However, remember to separately budget for your other (smooth) home operating expenses, including minor maintenance.[9]


Being a homeowner and property manager requires hiring and paying professionals to complete major maintenance on your home. Rather than putting together a complicated spreadsheet of the cost and remaining years of service for each of the major components of your home, you may instead consider setting aside a fixed amount each year to a dedicated home maintenance account.[10]

Each year you should aim to fund your account with at least 3% of the total replacement cost value of your home, which you can estimate from the dwelling coverage on your homeowner’s insurance—we use this method when creating financial plans for our clients. If you’re expecting a cluster of maintenance expenses over the next several years, you should frontload your savings so you’re not left scrambling when something big comes up in a few years.

This budgeting strategy will save you time, minimize stress and put less strain on your reserve fund and longer-term savings goals. With proper planning, home maintenance expenses are not an emergency. When your roof and water heater leak, your furnace dies and termites eat through your deck all in the same year, you’ll be happy you’ve been saving so diligently.

To speak with an advisor about planning for your financial future, contact us!

[1] If you’re a do-it-yourselfer, that’s great. Especially if you derive satisfaction from doing the work. However, don’t forget the old saying that time is money. The full cost of the repairs you do will include the value of the time you spend.
[2] One way or another you’re going to pay to upkeep your home—there’s no free lunch. Even if you never spend a dime or do a lick of work to maintain your property, you or your heirs will pay for the accumulated depreciation when the home is sold in the form of a lower sales price.
[3] When you bought your home, you prepaid more than a lifetime’s worth of rent. Your home “pays” you “housing services” (worth a month’s rent) every month. The annual cost of renting your home, or an equivalent, divided by the home’s fair market value is called the “imputed rental dividend.” For example, if renting your $500k home would cost you $25k a year, the annual dividend would be 5% ($25k/$500k). Think of it as tax-free interest on a bond or dividend on a stock. See The Investor’s Manifesto by William Bernstein or The Little Book of Main Street Money by Jonathan Clements.
[4] ACV = RCV – {RCV x (Age / Life Expectancy)}
[5] See for an example.
[6] The dwelling coverage is often referred to as “Coverage A.” Your insurer should re-estimate this number and update your coverage annually. As the insured, it’s important that you are properly covered—meaning your dwelling coverage is as close as possible to the true replacement cost value of your home. You should compare your insurer’s dwelling coverage with your own estimate by using an online calculator like the one by Craftsman.
[7] Replacement cost estimates are for a two-story 2,000 square foot single-family home in Boston, MA with components rated as “Class 3, Best Standard.” Life expectancies are representative of all components in each specific category and may differ depending on the actual materials used. For example, an asphalt shingle roof may last 20 years while a metal roof may last 60 years. In my calculations I use an average life expectancy for each component category (see Figure 1).
[8] This is called a weighted-average depreciation rate. Rather than take the average of each component’s depreciation rate (i.e., weight each component’s rate by the number of components), you weight each component’s rate separately by the relative cost of the component.
[9] Make sure to distinguish between minor and major home maintenance items. Major maintenance typically involves large infrequent expenses to replace or repair major components of your home. Minor maintenance, on the other hand, involves smaller more frequent expenses to upkeep your home. This may include snow removal, lawn care, interior cleaning, a handyperson and other various service contracts.
[10] Liquidity and protection of principal is important, which is why a bank savings account is a good idea. Putting this cash in the stock market is not a good idea. If the market crashes at the same time your roof leaks, deck and siding rots, and your furnace dies you’ll be in an uncomfortable position.