Normally, money expert Clark Howard recommends that you eventually save six months’ worth of expenses in your emergency fund (which he sometimes calls a “rainy day” fund).
But what happens when you own a rental property? Should you expand your emergency fund to account for maintenance and repairs? And should you be setting aside a specific amount of your rental income to build out that fund?
Do I Need a Rental Property Emergency Fund?
How much should I put into an emergency fund designed to cover repairs for my rental property?
That’s what a Clark listener recently asked.
Asked Justin in Indiana: "I'm 32 and own a paid-for rental property. What is a healthy amount of savings to set aside for future expenses, aka emergency fund, for such a property?"
Clark mentioned that it’s hard to answer without knowing more details about the property, such as how large it is. But he congratulated Justin on owning a rental property free and clear at 32 years old.
“If you were developing a portfolio of rental properties, I would have you every month contribute 10% of the rental income into a maintenance account for your rental property,” Clark says.
“In this case you have one rental property. And I would support even for that one doing 10% of the tenant’s rent each month into a savings account for unexpected expenses.”
Instead of living off of 100% of the rent, setting aside that portion will allow you to be prepared to handle it if your property needs a new roof, a new heating and air conditioning system or some other major or minor expense.
Do I Need a Separate Emergency Fund for a Rental Property?
What if Justin wants to maintain a single emergency fund for his day-to-day life as well as for the rental property? That way he can pay for any unexpected expense from the same pot. Is there a reason he should avoid taking that approach?
That depends on whether you own a single rental property, Clark says.
“But I do like for people who have multiple rental properties especially to have a separate fund that they fund with a portion of every tenant’s rent that goes in there to deal with the unexpected,” Clark says.
Final Thoughts
Clark suggests setting aside 10% of your rental income to handle unexpected costs. He also thinks that if you own multiple rental properties, you definitely should keep that emergency fund separate from the one you’ve established for your day-to-day life.
The post Do You Need an Emergency Fund for a Rental Property? appeared first on Clark Howard.