Like all other businesses, rental property owners have to acknowledge that they won't always have a steady cash flow. Several external factors can impact rental income, including economic growth, inflation, employment rates, and others.
While unavoidable, real estate investors can mitigate risks by having a rental property reserve fund. This is managed by setting aside a portion of the income in a separate bank account for a rainy day.
What Can You Use a Reserve Fund For?
Major Repairs
When you encounter problems in your rental property, such as structural issues, faulty systems, or amenity replacements, you can draw on your reserve funds to cover unexpected repairs.
Given that emergency repairs can be expensive, such as cracks in the foundation, roof replacements, or broken HVAC systems, setting aside money for these purposes can help maintain a consistent cash flow.
Extended Vacancies
Collecting rent is the primary source of income for rental properties, so when you have a lot of vacancies for some time due to low market demand, your real estate investment property can suffer.
Effective property management involves having a safety net to mitigate potential tenant turnover costs or income losses. This proactive approach can keep you from implementing rent increases and disappointing tenants.
Unexpected Legal or Eviction Costs
These non-negotiable expenses are not very common, but it is still something you should be prepared for.
Eviction and legal compliance costs can easily cripple your business if you do not have funds set aside to cover unexpected expenses.
Capital Improvements
Your reserve fund can also be used for improvements, such as replacing old doors, upgrading your floors, and applying a fresh coat of paint to your exterior.
This can make older properties look new, enabling you to charge higher rent and improving your property's appeal in the real estate market.
Insurance Deductibles
In the event of natural disasters, insurance usually covers your losses. However, some payouts take time to kick in, and a stagnant business is no good for you.
Property owners can utilize the reserve for unplanned expenses in the meantime, allowing the business to continue uninterrupted, regardless of when the insurance coverage arrives.
How Much Should I Set Aside?
As for the property reserve amount, you can determine it based on the property type, number of units, location, insurance coverage, legal and eviction costs, property taxes, risk tolerance, monthly operating costs, and other factors.
The general rule is to set aside 20% of the monthly rent amount in a property reserve account. For multiple properties, you may need a larger reserve fund compared to managing a single-family home.
If you have a lower risk tolerance, having sufficient funds in your savings account to cover several months of routine maintenance, repairs, utilities, and unexpected expenses ensures that your property remains in good condition.
You can also increase the reserve fund amount based on your investment strategies, and not just to mitigate financial risks. For instance, if you plan to purchase new properties, you can start placing reserve funds in a separate account for a down payment.
How You Can Benefit from Professional Property Management
Owning rental properties is a time-consuming venture, and ensuring you do everything correctly can become overwhelming quickly. While having a reserve for emergencies is a good strategy, companies like Area Texas Realty & Management strive to avoid needing it.
We aim to maintain your rental property and take care of your tenants, allowing for smooth operations and a highly profitable rental business.
Let us help you exceed your investment goals. Contact us today to get started on maximizing your rental property's potential.
