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As a real estate investor, your emergency fund is a critical line of defense against unexpected costs. It prevents you from investing your budget to deal with these issues.
but what do you do real What to do with your emergency fund? How much money should you keep in your safety net? Here’s everything you need to know.
But first, I’m a firm believer in owning a “no big deal” fund. what is the difference? mentality. Investing is not gambling. You don’t have a sure amount of money you can afford to lose, and you don’t have to spend hours at the slot machines and gambling tables.
What could your “no big deal” fund be used for?
Single Family Rental (SFR) investors should have access to capital and a modest fund before purchasing their first property. This is not a rule, but advice from experienced investors. Planning to use your monthly rental income to fund a no-big-deal fund isn’t a recipe for disaster—it’s a disaster in itself.
Funds. Here are three great ways to use that money.
1. Make up for the temporary income gap
Every real estate investor knows The job vacancies are expensive. While we hope residents will renew their leases and often stay in place, this doesn’t always happen. People move on, sometimes unexpectedly.
Use your safety net to anticipate and cover expenses during these periods. While you don’t want to rely on emergency funds to replace your income, they can help you Pay your mortgage, insurance and property taxes during this period.
2. Emergency repairs
Regular maintenance tasks are one thing, major repairs are another. Your emergency fund covers these events. When this money is reserved and earmarked, you can quickly resolve issues that adversely affect property value and cash flow.
3. Pay insurance deductible
Insurance itself is another form of safety net. However, insurance claims almost always involve a deductible. For investors, having cash put Dealing with problems while you’re at it, even with insurance involvinghelps the process move forward.
What purposes should the fund not be used for?
Such a fund not for used for only However, anything. There are three taboos here exist How to spend this money.
1. Appearance renovation
Technically, you can spend your no-big-deal money on anything. There are no rules against it. However, we advise against spending emergency funds on purely cosmetic renovations.
Renovation It is possible (and does) to increase a property’s equity through forced appreciation, but not all upgrades have an impact in this way. If you’re dipping into your precious savings, make sure it’s worth your time.
2. Personal expenses
Keep The financial status of your business/investment and Personal finance is always smart. The emergency fund you set aside for SFR No For your personal billing purposes.
3. Debt repayment
Investors need a separate debt management Strategy in place. While you can dip into your coffers to pay off debt in a pinch (such as a mortgage during a vacancy), it shouldn’t become a habit. Doing so will drain your resources and potentially get you into trouble at a critical moment.
Where should investors’ safety net be placed?
Now that you know where your emergency fund should be spent (and not where), where should you put it? Here are three suggestions.
1. Traditional Savings Account
Depending on how your business is structured, you may be able to open a savings account to supplement your existing business checking account. The key here is to keep emergency investment funds separate from your own money. personal financial.
2. High Yield Savings Account
This type of account offers higher interest rates than traditional savings accounts, providing a substantial level of growth while keeping funds easily accessible. High-yield savings accounts are FDIC insured, making them a safe choice for your safety net funds.
3. Money Market Account
Money market accounts combine the features of savings and checking accounts, offer higher interest rates than regular savings accounts, and provide check writing capabilities. They also often come with FDIC insurance or are backed by government securities, making them a relatively safe bet.
Although some possible It is recommended to put emergency funds into bonds, certificates of deposit, or other low-risk investments, which can cause problems. For example, CDs require a lock-in period, which can prevent you from accessing your funds for months or even years. Bonds are a safe investment and relatively liquid, but there are some extra steps you need to take to get cash.
How much does my emergency fund need?
There is no one amount that will meet everyone’s needs. The best rule of thumb is: Each property you own requires at least three to six months of expenses. this Includes mortgage payments, property taxes, insurance, maintenance and other recurring expenses.
Then, after deducting mortgage, insurance and management fees, you are left with net rental income, And add it to your existing No Big Deal fund until you reach your target amount per property. For me, this has been Up to 12 months of expenses when i startedand now I around landing six to eight months as Very comfortable and worry-free amount i like to have.
Because the amounts between portfolio growth, cost changes, and goal adjustments can change over time, you’ll want to revisit your goals. Review your financial situation regularly and adjust your no-large-trade funding goal as needed.
For example, if you follow this advice, you will start from a very strong position and only get stronger. You can then reduce your NBD funds to three to six months per property and reward yourself for a job well done! You can choose your rewards, but be sure to celebrate all your wins—even the ability to maintain a modest fund over the long term.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
