What is an Emergency Fund?
March 15, 2021
For the landlords and real estate investors, ROI and cash flow are everything. You’re constantly on the lookout for ways to make your rental properties more profitable, which means maximizing the upside and counteracting the downside so that it doesn’t come back to bite you. And even though there are no bulletproof methods of downside protection, there is one method that can significantly lessen your chances of experiencing a financial catastrophe. It’s called an emergency fund.
Rental Property Emergency Funds: What and Why
In the simplest terms, an emergency fund is a source of stable and liquid assets that you’re able to draw on in an emergency or unforeseen situation. This may include a sudden repair, maintenance issue, or prolonged period of vacancy where there is no income to offset expenses and bills.
As a general rule of thumb, you want at least three to six months worth of expenses inside your emergency fund. Thus, if it costs you $2,000 to pay the mortgage and all bills associated with the property, you’ll want somewhere between $6,000 to $12,000 in your emergency fund account.
In order for it to be considered an emergency fund, the money needs to be accessible, yet out of reach. It should be in its own checking or savings account separate from the rest of your personal or business expenses – clearly designated so that you know which property it belongs to. An emergency fund should not be tied up in risky investments like stocks (or even bonds and CDs, which can be difficult to convert to cash in a timely fashion).
A properly stocked emergency fund does a few things, but it serves two primary purposes:
- Protection. The purpose of an emergency fund is to protect you in a situation where a sudden expense emerges. It allows you to easily float the cost without having to take out a loan or delay a much-needed repair.
- Peace of mind. Your emergency fund shouldn’t have to be tapped very often. Most of the time it simply provides peace of mind so that you don’t have to worry about potentially negative outcomes, like not finding a tenant or getting an expensive home repair bill.
In other words, you don’t want to do without an emergency fund. Doing so is like walking on thin ice in the middle of a frozen lake. You might be able to tiptoe around for a while, but you’ll eventually find yourself in trouble.
If you are looking to hire a Property Management company to manage your property then consider hiring ACCL Property Management. For free consultation, please email us at info@acclpropertymanagement.com or call us at 905-432-8961
