Tip #48

How to Build an Emergency Fund for your Rental Properties

Written on February 27, 2015 by , updated on February 28, 2015

Emergency FundA savings account. An emergency fund. The piggy bank. Whatever you call it, most of us think it is wise to have some extra cash saved up for a rainy day.

We all seem to understand that “life” happens, but it’s still frustrating when the car’s transmission drops out in unison with a job loss, or an expensive root canal.

If you have an emergency fund, unexpected expenses aren’t so scary.

Dave Ramsey is a financial radio show host, and he has been a huge inspiration in my personal financial life. Of all his advice, I think his best recommendation is to build an emergency fund of 3-6 months worth of expenses.

Though Dave is considered a “personal finance” coach, I think his advice is still applicable for businesses, especially in the rental industry.

Step 1: Separate your Bank Accounts

Most small asset landlords don’t really view their rentals as a business, and as such, they manage it as an extension of their personal finances. After all, it’s easier that way, but it’s riskier and sometimes illegal to commingle funds.

It’s best to separate your bank accounts, and for some, it’s even wise to create a business entity for the rental business.

In fact, most states require a landlord to store the tenant’s security deposit in a separate bank account, so that the funds are not commingled with personal money, or deposits from other tenants.

Related: How to Handle Security Deposits Properly

I believe that landlords should have a variety of bank accounts, separate from personal accounts, in order to successfully operate their rental business.

Every landlord should have:

  1. An operating account
    You’ll deposit rent, and pay the mortgages, taxes, insurance and other expenses, for all your properties, from this account.
  2. A security deposit account for each rental unit
    You’ll need one bank account (with checkwriting privileges), for each unit you own. Deposit the tenant’s security deposit into this account, and leave it there until the end of the lease. Cozy can collect the deposit and send it to a separate account for you, automatically!
  3. An emergency fund account all the properties
    This is a single savings or money market account that acts as your safety net. You can combine this money with your operating account if you’d prefer, as long as you don’t overspend it away.

Step 2: Build a Realistic Emergency Fund

Like a personal savings, I suggest you build an emergency fund to handle all unexpected repairs and help mitigate your vacancy losses.

But how much should I have in the emergency fund?

The more properties you have, the more can go wrong – but the good news is that it won’t all go wrong simultaneously.

This is why I recommend at least three months worth of expenses for at least half of your properties.

If you only have a few units (1-10), your rent is limited, and major repairs will consume a higher percentage of the overall income.

As you grow your portfolio to more than 10-15 units, you are essentially diversifying your assets, and each property becomes a smaller percentage of the whole pie.

As such, I think the formula can then be adjusted to a minimum of three months worth of expenses for a third of your properties. This is essentially, the total is one month’s expenses for the sum of all your properties.

Calculate a Minimum Emergency Fund

To calculate a small asset emergency fund (1-10 units), add up the following expenses for all of your properties:

  • monthly mortgages
  • taxes
  • insurance premiums
  • condo fees
  • operating utilities

Then, multiple it by three, and then cut the total in half to reveal your minimum emergency fund.

Notice that I did not include repair costs or service fees (like landscaping), because if the money train stops moving, the first thing to get cut is the gardener and nonessential fixes.

You should, however, always include utilities because you have a legal obligation to keep the lights and heat on even if the tenant fails to pay rent.

Related: Landlord-Tenant State Laws and Regulations

The Formulas

Mortgage Costs (PITI) + Condo Fees + Utilities =
1 month of expenses per property


((Monthly Expenses for all Units) x 3) / 2 = Minimum Emergency Fund

Small Portfolio Example:

If the total monthly PITI + Fees + Utilities for my four units = $12,000, and I multiplied that by 3 months, my fully funded 3 month emergency fund would be $36,000.

However, since all four units won’t need repairs or experience vacancies at the exact same time, I divide it by half, thereby making my minimum emergency fund = $18,000.

Large Portfolio Example:

If I have 20 units, and the total monthly expenses equal $40,000, then multiplied by 3 months, my fully funded 3 month emergency fund would be $120,000. Since a larger portfolio is more diversified, and carries less risk, I need less cash to insure an emergency.

Dividing it by one-third (instead of one half), would reveal my minimum emergency fund to be $40,000 (essentially, a one month buffer if everything goes wrong at the same time).

Funding the Account

Now, for the tricky part.

How do I fund the account?

The answer is simple to say, but hard to execute.  Here are a couple of methods to get the cash for an emergency fund:

  • Set a budget within your monthly income/expense, and save up the money.
  • Sell a property and save the profit.
  • Manage the properties yourself (via Cozy), and set aside 10% of the monthly rental income (in lieu of hiring a property manager).

Step 3: Remember to Rebuild

Remember, the goal is to keep this minimum amount in your account at all times. If you pull from this savings, or go below this minimum threshold, be sure to rebuild it as fast as you can.

If you have quite a few older properties, typically have a lot of vacancy (20% or more), or are just risk averse, you should consider changing the calculation to cover 6 month’s of expenses – essentially, doubling your emergency fund.

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8 CommentsLeave a Comment

  • Susan

    This I wise advice. I will start with my paycheck. and after expenses/utilities’ of the rentals. I have only two rentals. 10 -15% monthly. in a 1 1/2 yrs. time I will have what you recommended. I do already have a separate checking account for the expenses.

    • Lucas Hall

      Hi Susan,

      Congrats on completing the hardest part… you decided to take action! Believe me, you’ll sleep better knowing you have a cushy emergency fund.

      When an emergency happens (like a leaky roof during rainy season), then theres’ nothing to stress about – just find an available contractor and write the check. Less stress, Easy peasy.


  • Kevin Bradberry

    The emergency fund you’ve described makes sense up to the point of large repairs. I have one rental property, a single-family house, and the emergency fund would add up to $3,000. This would not cover complete exterior paint or a new roof. What is a common financial plan for large expenses such as that? (For the sake of this example, the paint and roof work are due to typical wear and tear, not anything home insurance would pay for.)

    • carto

      Building a major projects account could come from choosing to set aside a percentage each month. Like a business tithe, one would have to pay into the account diligently.
      It seems that it would only accrue slowly and small amounts doing it thusly.
      Perhaps researching a line of credit or loan for the work would guide how much a set aside should be. That way, if you take a loan to get the work done, you would already be accustomed to paying the amount needed to serve the debt and you would have a down payment to get the work started.

  • Hope

    First time landlord of condo. Once I get my 3-6 months of emergency fund. Do you recommend building further with a percentage or paying extra on your mortgage principle? What would you recommend as that next step?

    • Lucas Hall

      Hi Hope

      Welcome! Yes, once you build up your emergency fund, try to pay down your debt as fast as possible. In some cases, a property can be paid off in 5 years or less. Then, save up the rent payments after the loan has been paid off and buy another rental with cash.

      In high-priced areas, this strategy takes too long to implement, so you could potentially use some of the equity in the 1st rental to buy your 2nd, and so forth.

  • Jack Mulligan

    I’m always amazed at how easy it is to prepare for emergency maintenance if you’re aware of it early. It’s not fun to plan for emergencies, but you don’t want to be caught without the funds you need when one comes up. In addition to the money side, make sure you have a good maintenance service available to help you out when you need it.

  • Lorene

    Four score and seven minutes ago, I read a sweet arcleit. Lol thanks

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