How to Build an Emergency Fund
April 1, 2021
1. Organize Your Bank Accounts
Disorganized finances will get you in trouble. They’ll also defeat the purpose of having an emergency fund (as expenses will get commingled). Feel free to take whatever approach you think will work for you, but we recommend the following:
- Have one operating account through which you deposit rent, pay the various mortgages, taxes, insurance, etc.
- Have a security deposit account for each rental property. Nothing else goes into this account.
- Have an emergency fund account for each property. (This may eventually turn into one fund, but you can read more on that in tip number five.)
This sort of organization might seem over the top, but the more organized you are, the more efficient and profitable you’ll be.
2. Calculate Your Expenses
You can’t build an adequate emergency fund without first knowing what your monthly expenses are for each property. To calculate this amount, add up all of the following:
- Monthly mortgage payment Taxes
- Insurance premiums condo fees (if applicable)
- Operating expenses
It’s usually the operating expenses item that gets people. For a realistic view, go back and review your bills from previous months and take the average.
3. Fund the Account
If you currently have no emergency fund (or a very low cash supply), it could take some time to build up the fund. You can do it gradually over a period of a few months – taking as much of your monthly rental income as you can and designating it for the emergency account.
4. Keep it Safe
As previously mentioned, an emergency fund should be kept in a safe place. This means a traditional checking or savings account. Since this account could have a fairly large sum of money, it’s best to shop around and look for the best savings rates. You won’t earn much, but a small difference in interest rates could earn you a few hundred dollars per year.
5. Start Big and Gradually Taper Off
When you have just one or two rental properties, maintenance and repairs are going to represent a larger percentage of your pie. When something goes wrong, it can eat up a lot of your savings. So it’s for this reason that you should maintain at least three to six months of expenses per property. But as you add more doors to your portfolio, you can taper off and create one big fund.
Something like two months of expenses per property in a single emergency fund checking account can work when you have a large portfolio. (You’ll still have emergencies, but not every property will experience an emergency at the same time. This gives you greater flexibility)
6. Always Replenish
An emergency fund only works if you replenish it after use. If you take out $500 to pay for a new kitchen appliance, you should put $500 back into the account the next time you collect rent checks. A failure to do so will eventually drain your emergency fund and leave you in a precarious situation without any protection against unforeseen circumstances.
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
