Property emergency fund question

12 Replies

how do you calculate how money money you should have in an emergency fund for the property to cover vacancies/repairs? I will give you a scenario. Lets say the home you own and rent out is valued at 125k and was build in the early 80's but is in good repair and the roof is fairly new. Would 5k be enough to where you wouldn't have to worry? Obviously if the fund is emptied for a repair you would replenish it but how so you all figure the correct amount of "just in case" money

I have always used the guideline of 3 months equal to the rent if the property is in good shape. I was given that number during a loan application- I think it is what banks expect to see. Otherwise, major repairs should be something you see coming and save up separately for if you are properly insured. You might have to adjust it higher or lower once you have actual historical data as your expenses and vacancies can very a lot per property.

You probably should have;

  1. A few months of mortgage payments for vacancies
  2. every month save 1/12 of known annual expenses like taxes and insurance
  3. a reserve account for future capital expenses

I will use a water heater as an example for capital reserves. A water heater costs about $600 installed. If it lasts typically 6 years, that water heater is essentially costing you $100 a year. The problem is you don't see that cost until you need to come up with $600. Six hundred dollars for a water heater is an expense you can probably cover out of cash flow. But add in appliances, furnace, roof, AC, carpet, windows, etc and you can see how if several expenses hit at once, you can be in deep trouble.

Calculate the expected life of each item. Then divide the cost to replace by the number of years left to figure how much capital reserves you need to set aside every year. You will be surprised how much that adds up to.

Now do most people including me keep enough for all three above - no. But you should. Do what I say not what I do LOL

Good luck - Ned

@Luke Woods

Well @Ned Carey nailed the answer. I used to prepare reserve studies for over 100 different homeowner association here in Northern California.

Mr. Carey said everything that needs to be said including the confession. I'm guilty of underfunding as well.

Now, here's where you can help yourself. My new favorite thing is to use some of my reserves to buy deeply discounted gift cards to Home Depot. This helps my money go much farther.

Best to you

Bad luck comes in three's . I had a well pump , outdoor unit on the AC , and the water heater all go out at 1 property the same month . Prepare for the worst . I did the well pump and water heater myself , paid a buddy to replace the AC , the total cost for all three was less than 2 grand . Would have been 3x that if I hired it out .

Originally posted by Al Williamson:
I used to prepare reserve studies for over 100 different homeowner association here in Northern California.

Al, I had a neighbor who did that. That is where Learned the concept, long before I ever considered buying a rental property. I remember being impressed by the concept. It seemed so sophisticated yet obvious once explained.

@Luke W. - once I quit buying properties, I started setting aside 5% of gross rents for maintenance reserves... just in time to incur a completely out-of-the-blue foundation repair. Was I ever happy to have a reserve. Until I was done buying, I just tried to stay a few thousand ahead and in good standing with my banker...

@Al Williamson , I have heard of discounted gift cards... do tell where you find them please?

Thanks for the set up @Deborah Burian ... I've just finished writing a series about discounted gift /store credit on my home blog. The tactic is helping me achieve my $100 per month expense reduction goal.

I've created roughly $70 of savings since we started the challenged (that you won). And I'm waiting on the results of my latest idea before announcing that I can join you in the winner's circle.

Read my last three posts and see how you can start saving money right away!

@Luke Woods , if you only have 1 property you need to keep at least 6 months of your rent aside for expenses if you can. Always keep your deposit money separate as well. Since I have several rentals I look at each year end accounting to see how much I spent on Rental repair, etc. to use as a guideline for the coming year. I try to see how much vacancy as well. As to taxes and insurance I just set that aside in a different account so it is always there, since it will always come due. I try to keep about 5K in a savings account that I only touch for a major repair. The reason for that is if the money is sitting in checking I tend to spend it. Again since I have several rentals I try to keep a new or very nice used fridge and stove on hand, since i can get a fridge for $200 cheaper if I buy it when there is a sale on. It is also at least a 3 hour drive to pick up a new fridge. If I have a big ticket item I know will need replaced like a roof getting in bad shape, I try to put the money into the saving account until I am ready to buy the materials. My biggest problem is if I have a lot of money in checking I start looking to buy another rental.

@Luke Woods It all depends on your hold costs and comfort levels. Does your area have a long eviction period like Baltimore (2 months or more). Do you large utility bills during your downtime, mortgage, repairs, lease up, etc etc. Do you have personal reserves you can tap into.

I recently went through a two month renovation that cost $8k for one property. Granted, that should have been lower cost and done quicker, but it wasn't. For me that was 8 months reserves for 1 property. Since I have multiple properties it was far less of my reserve money. I recommend reading Brandon Turner's post on his hell month.

The short answer is: I would keep 6 months "rent" as reserve for one property and adjust as you acquire more. As strange as it sounds, its actually easier to have more properties that can ease the pain of 100% vacancy and hold costs when one property is between tenants.

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