Whether you’re a homeowner or a landlord, it’s always wise to have an emergency fund to pull from when unexpected expenses come up. Most financial advisors recommend property owners save at least 3 – 6 months’ worth of expenses to cover maintenance, repairs, mortgage loss of income, and other financial concerns.
However, only around 39% of Americans have the additional funds on hand to cover a $1000 repair. It can be difficult to know where to begin when it comes to building an emergency fund, but here are some simple steps you can take to get started. Please note that this is not intended as legal advice, but for information only. Laws may vary depending on your location.
Tips for Creating an Emergency Rental Fund
- Keep Separate Bank Accounts
Although it may seem easier to manage your rental finances as an extension of your personal finances, this could end up being risky—and in some cases, illegal. Most states actually require landlords to have a dedicated bank account to secure tenant security deposits. This helps keep everything separate so there’s no chance of mixing up your money with security deposit money. You may also want to consider creating a business entity for your real estate business. Here are a few things every landlord should have:
- An operating account for rent deposits, taxes, mortgage payments, insurance, and other rental expenses.
- A dedicated security deposit checking account for each rental property. When you receive a security deposit, deposit it in its individual account and leave it there until it’s time to return it to the tenant.
- A single emergency fund account for all the properties you own. While this could be combined with your personal bank account, it’s often better to keep this fund in a separate account so you can easily keep track of what you’ve spent.
- Building Your Emergency Fund
Just like a personal bank account, your emergency fund can be used for any unexpected repairs or vacancy loss mitigation. If you’re not sure how much to put into the fund, three to six months of expenses is a general rule of thumb. This can become more complicated the more properties you own; if you only have a few units, your rental income will be lower and major repairs will probably use up a higher percentage of your income.
- Calculating an Emergency Fund
If you have 1 to 10 units, you can calculate your emergency fund by adding up the following expenses for all the rental properties you own:
- Monthly mortgage payments
- Taxes
- Insurance premiums
- Condo fees (if applicable)
- Utility costs
After you’ve added up these expenses, multiply the total by three and divide that by half. This amount will be your minimum emergency fund.
The Importance of an Emergency Rental Fund
No matter how many properties you own, emergency funds are a vital way to ensure you can pay for any unexpected expenses that arise. This will give you peace of mind and help you stay afloat in times where you might have more vacancies or expenses than usual—as well as if your tenant fails to pay rent. Although managing several accounts may seem like a hassle, you’ll be glad you did when the time comes to use them.
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