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An emergency costing around $1,000 can be financially hard to cover for almost 61% of Americans, according to a 2021 Bankrate research. Emergency expenses in the form of hospital bills, car repairs, and house repairs are problems faced by three in ten Americans.
In the survey, 18% of the urgent and unexpected expenses of the respondents are under $1,000; 41% cost between $1,000 and $5,000; and 36% cost over $5,000. The remaining 5% are answers from respondents who didn’t know how much their emergency expenses or chose not to respond to the query.
The study results suggest that every individual or family should have an emergency fund. But it's a common question from many people how much they should save for urgent and unexpected expenses. For rental property owners, having an emergency fund is extremely important. Here are the things real estate investors should know about this matter.
What is an Emergency Fund?
An emergency fund is a personal savings the depositor can use for unexpected expenses. This cash reserve is risk-free and easily accessible anytime you need to pay for emergency expenses, such as loss of income, medical bills, car repairs, or house repairs.
Unlike real estate investments and stocks, emergency funds are stable and can be easily liquidated. The depositor can withdraw any amount from an emergency fund without incurring financial losses or tax penalties. Any banking account with high volatility and not enough liquidity doesn't fall under an emergency fund.
How Much Money Should Be in Your Emergency Fund?
This question is a tricky one because people are in different financial situations. But the thing to consider regarding how much to put in your emergency fund is the variability of your income. The more unstable your income and expenses, the more you should save in your emergency fund.
Financial experts typically recommend measuring how many months of living expenses you can survive using your emergency fund. You should surpass the $1,000 threshold and calculate the number of months rather than focusing on your total savings.
Let’s say your monthly expenses have a total of $3,000, and your emergency fund is $6,000, then you can cover two months' worth of expenses using the fund. The question is will it be sufficient for anyone to have a 1-2 months' worth of emergency fund?
Someone with a stable income and expenses will probably survive with 1-3 months’ worth of emergency savings. In comparison, it will be difficult to tell about a person with a variable income. A full-time rental property owner with a less-predictable income will need larger than 1-3 months’ worth of the emergency fund.
Rental property owners or real estate investors may go for months with no or less income. That’s why they should save more on emergencies and unexpected expenses to keep their business going. It’s advisable for rental property owners to have 3-6 months’ worth of emergency funds or more for that purpose.
Each Property Needs an Emergency Fund
The typical monthly expenses a landlord has to pay to include property management fees and mortgage payments. Of course, other irregular expenses like maintenance, repairs, vacancy, accounting, and insurance need also to be considered.
Each rental property should have its emergency fund, where you save a percentage of a month’s rent. For you don’t know when there’s a vacancy and have no rental income for an indefinite time. Worse if there are structural replacements or property repairs that add up to your financial woes.
Use a cash flow calculator to estimate the average costs for such expenses. It will help you discipline yourself by depositing a portion of your monthly income in your emergency fund.
Where to Put Your Emergency Fund?
Put your money for your emergency fund in an account that you can tap quickly. Consider a savings account, short-term investment account, or money market account. Make sure it’s Federal Deposit Insurance Corporation or FDIC-insured.
Your account should have no penalties for early withdrawals or minimum balance requirements. Consider enrolling in a savings account with the highest return (2% or 2.5% interest), but always check the fine print first. Remember to separate your checking account and your emergency fund.
You can layer your emergency fund, which means keeping a savings and an investment account. For instance, you save two months’ expenses in a high-interest savings account and another two months’ expenses in a crowdfunding investment or government bond fund.
Final Thoughts
Now you know how emergency funds work for rental property owners. In times of loss of income or unexpected expenses, having an emergency fund can help you cover expenses, such as maintenance, repairs, vacancies, insurance, and so on. It benefits landlords to choose a savings account that yields a high interest, or they can also layer their emergency funds with stable, short-term investments.
