Property emergency fund question

[Luke Woods]

how do you calculate how money money you should have in an emergency fund for the property to cover vacancies/repairs? I will give you a scenario. Lets say the home you own and rent out is valued at 125k and was build in the early 80's but is in good repair and the roof is fairly new. Would 5k be enough to where you wouldn't have to worry? Obviously if the fund is emptied for a repair you would replenish it but how so you all figure the correct amount of "just in case" money

[Ned Carey]

You probably should have;

1. A few months of mortgage payments for vacancies
2. every month save 1/12 of known annual expenses like taxes and insurance
3. a reserve account for future capital expenses

I will use a water heater as an example for capital reserves. A water heater costs about $600 installed. If it lasts typically 6 years, that water heater is essentially costing you $100 a year. The problem is you don't see that cost until you need to come up with $600. Six hundred dollars for a water heater is an expense you can probably cover out of cash flow. But add in appliances, furnace, roof, AC, carpet, windows, etc and you can see how if several expenses hit at once, you can be in deep trouble.

Calculate the expected life of each item. Then divide the cost to replace by the number of years left to figure how much capital reserves you need to set aside every year. You will be surprised how much that adds up to.

Now do most people including me keep enough for all three above - no. But you should. Do what I say not what I do LOL

Good luck - Ned