ROI and cash flow are important for real estate investors. You are constantly looking out for ways to make your rental properties more profitable by maximizing the upside and counteracting the downside. But there is no bulletproof method when it is on the downside, but there is one way to lessen your financial catastrophe – an emergency fund.
In reference to personal finances, you have probably heard of an emergency fund several times. You might even have your own. But did you know that you also need an emergency fund for the rental properties that you have?
In the simplest way to say, an emergency fund is a source of stable and liquid assets that you are able to pull in an emergency or unforeseen situation. Situations such as sudden repair and maintenance issue, a prolonged period of vacancy, or even the effect of this pandemic where there no income to offset expenses and bills.
The general rule of thumb when it comes to an emergency fund is to have at least three to six months’ worth of expenses in your emergency fund, but this pandemic has changed that rule. Thus, it if costs you $800 to pay the mortgage and all the bills associated with the property, you will want to have an emergency fund somewhere between $2400 to $4800.
To have a realistic approach, review your bills and expenses for that rental property and get the average. Once you get the average, multiply it by 6 to get the allotted emergency fund for that rental property for six months.
And for it to be considered as an emergency fund, the money should be accessible yet out of reach. It should be separate from your business or personal expenses. And it should be clearly designated as an emergency fund. It should not be placed with investments.
An emergency fund for your rental properties serves the following purposes:
Protection. The objective of an emergency fund is to protect you in the event where a sudden need for expense emerges for that rental property. It allows you to float easily the cost without having to borrow or take a loan or delay any repairs needed for that property.
Peace of mind. Your emergency fund should not be tapped very frequently. An emergency fund provides you peace of mind that you would not have to worry financially when downside happens in your rental property such as vacancy in your rental or emergency rental repair.
In other words, an emergency fund for a rental property is important. It will save yourself from financial trouble when it finds you.
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