If you own rental properties -- especially more than one -- then having a flush emergency fund on hand is non-negotiable. Covering the occasional plumbing fix or broken window is one thing, but what if a tree falls through one of your properties' roofs? Or a tenant finds mold or a termite infestation? The costs to fix these issues could be hefty -- making it hard to keep your other properties (as well as your entire business) afloat.
Do you want to safeguard your bottom line and business? Here's how to build up that emergency fund -- and how much you should aim to save in the process.
Building up your emergency fund
First and foremost, set up a separate account for your emergency savings. This will give you a clear picture of just how much you have stowed away, and it will also remove any temptation to use the funds toward daily operating expenses.
Next, automate your savings efforts. About a week after rents are typically deposited, schedule an automatic payment from your main bank account to your emergency fund. It can be for $100, $500, or whatever you can afford; just make it a regular, consistent deposit to start building up that account.
Another way to automate your savings is to use a tool like Acorns or Chime. These connect to your bank account, and whenever you make a purchase, they round up the transaction to the nearest dollar, sending those extra funds straight to a savings account of your choice. It's a great way to build up savings without any effort (and almost unnoticeably).
You should also consider building emergency funds into your rents. Maybe add an extra $50 to next year's rent upon renewal, and then commit to putting those funds directly into your emergency account. It might not seem like much at first glance, but over time -- and across multiple properties -- it can really start adding up.
How much do you need?
There's no hard and fast number you need to reach, but there are some general guidelines to point you in the right direction. Experts typically suggest having at least three to six months of a property's expenses in the bank just to be safe. So if you have five properties, tally up those costs and multiply by three -- at the bare minimum.
You should also take the age and condition of your properties into account. Older homes and properties that were previously distressed are likely to need more repairs and thus require more funds stashed away. Properties in extreme climates or where natural disasters are common will need extra funds as well.
Finally, think about the repairs your homes are most likely to need. If you know Property A hasn't had a new roof in 25 years and Property B's HVAC is getting old, you can probably pencil those expenses in. Use tools like HomeAdvisor and Fixr to estimate what you might owe for projected repairs down the pike.
The bottom line
You never know what problems are going to crop up on a property, so if your income relies on those homes, having a flush emergency fund is critical. Take steps to start building yours today, and don't get caught dipping into operating funds the next time a repair arises.
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May 15, 2021 at 06:00PM
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Building an Emergency Fund for Your Rental - Motley Fool
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