John asked a great question in our HTM Facebook Group forum…
“I’ve had a rental property for about 10 months now and slowly socking away 100% of the extra income in a reserve account. How much is enough for an emergency fund in this situation??”
Matt & Joel’s response: Congrats on your new rental! Glad to hear it’s cash flowing positively and you’re stashing away all the proceeds.
The short answer is, you should save between 3-6 months worth of expenses in an emergency account for your rental property. And it’s important that this is completely separate from your personal e-fund.
While this is a good rule of thumb, there might be other expenses or emergencies you want to plan for. Each rental property is different! So here are a few nuances to think about…
3-6 month emergency fund
The general consensus is to carry at least 3-6 months worth of expenses as a basic emergency fund for each rental property.
This amount should carry you through a 3-6 month vacancy period without having to tap into any of your other savings.
Ongoing fixed expenses are things like your mortgage payment, taxes, insurance, and any regular maintenance like landscaping.
Here’s an example. Let’s say these are your monthly expenses for the rental:
- Mortgage payment: $1400
- Property tax: $250
- Insurance: $150
- Maintenance: $200
The total monthly expenses are $2,000 per month, so your emergency fund should be approximately $6,000 – $12,000.
Disasters & insurance deductibles
It’s also a good idea to think through the most common disaster scenarios that you could get hit with. These are specific to your rental property, location, and age of the stuff inside.
For example, I have a friend with a fourplex in Texas just outside of Houston. Due to the excessive heat and humidity his rental constantly has HVAC unit blow-ups. Replacing those units it can be like $5k a pop!
One summer he had to replace two HVAC units in the same week when a massive heat wave came in. Luckily he had $10k+ in e-funds to cover it all!
As a bare minimum, you’ll always want enough emergency funds to fully cover your insurance deductible. For massive disasters (like a hail storm that damages your roof, or if a tree falls on your house) you’ll likely file an insurance claim. If your deductible is say, $7,500, you will need to have that available in cash.
Sinking funds vs. e-funds
Upcoming repairs are another consideration. And they have to be saved for too.
While you certainly can tap your e-fund to cover larger maintenance tasks, this might leave your cash pile too low to cover an unexpected emergency.
So we always recommend having sinking funds for some of those large projects. Going back to my friend’s HVAC unit example, he knows that a couple of his units are approaching the 10 year mark in age. He’s already setting aside a few hundred each month, anticipating that one will need replacing soon.
Roof replacement is a sneaky large expense that many rental property owners forget to account for. And it can cost a lot of money!
A few Facebook commenters suggested looking up the age of the roof, what a replacement cost would be, and to start saving up monthly for that.
For example, if you’ve got ~5 years of age left on your roof and a new one would cost $20k… Try saving up $350 a month or so to build up bulk reserves to replace that roof in 5 years.
Where to keep the emergency funds?
We hope you already know the answer to this… All emergency funds, whether it’s for personal or a rental property, should be kept in a High Yield Savings Account.
This way you’ll earn a little bit of interest on that cash and not completely get screwed by inflation.
Just make sure that whatever bank you stash your cash with is FDIC insured. You want that money protected, and available to be used at the drop of a hat should a disaster strike.
What if you have multiple rental properties?
John, we’re not sure if you plan on buying more investment properties (we hope so!), but you should also know that each rental property needs to have its own emergency fund.
It’s tempting to keep a flat large amount to cover all types of expenses. Like, $20,000 in cash to cover any emergency across 5 different properties.
But, you might face a huge problem if you have 2-3 emergencies simultaneously. $20k won’t stretch that far if you have 2 vacant properties and the others spring large repairs in the same month.
It might seem like a low probability, but it happens! Covid was a great example of some landlords getting really hurt by not having incoming rent across multiple rental properties. Those with large cash piles made it through. Those that didn’t found themselves in rough shape.
I know it sucks to be sitting on a lot of cash, but it’s better to play it safe vs. risk your rental empire by not having e-funds saved.
The Bottom Line:
Each rental property you own should have an emergency fund set aside to cover disaster expenses. 3-6 months worth of ongoing expenses is a good rule of thumb for how much to save. But you should also think through those major potential disasters and how you would respond if they hit.
Also, general planned maintenance should be saved for by setting up sinking funds. Think about the big ticket items in your rental (HVAC units, roof replacement, appliances, etc) and make a savings plan in advance instead of waiting until those bills surprise you.
Good luck, John! We hope you are enjoying being an investment property owner!
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