Why You Need An Emergency Fund For Your Real Estate Business

Even a well run real estate business with a good reputation and with a foresight to weigh up possible risks can still run into unexpected problems and setbacks.

Skilled real estate investors buy houses and resell them so quickly for a return on their investment so that any costs incurred are residual and easily absorbed by the profits. Flipping houses, whether or not there is any rehab, is associated with wholesaling. And the principle of connecting sellers to buyer’s works for all kinds of commodities, including houses. After starting out in real estate business, a few successful transactions can make a tidy sum with enough to live off and reinvest back into your business venture.  However at this point, it is prudent to start to set aside a sum into a fund to cover for unexpected delays and problems.  For example, a house bought at an auction may come with faults that you will be obliged to declare or rectify.  Either way, to sell this real estate property you will either cut back your profit margin by selling cheaply or you may decide that you can make a handsome profit by giving the house a rehab.

To do the real estate rehab, you are going to need cash to buy materials and to pay your certified contractors.  Depending on the extent of the rehab and if this goes beyond a paint job and new counter tops in the kitchen or to replacing rotten woodwork and a new roof then, you need to tie up a pot of money for several weeks or even a few months.

If you are a very lucky person, used to things that are always going exactly your way, then you may think why bother to keep money tied up just in case. In real estate wholesaling, sooner or later you will need funds for such a project unless you have a cash rich partner willing to stump up the necessary funds at short notice and you would be well advised to make a provision for such occasions.  A sum equivalent to six months operating costs for your real estate business is considered a workable amount to cover for unseen events that could see your business falling over a financial cliff.  You still need to pay wages, overheads for home / office associated with your real estate business, not to mention taxes, insurances and HOA dues.

As well as having the real estate emergency fund to continue paying for bills you already know about, also consider some other reasons that are not as foreseeable:           

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•     Renters unable or unwilling to pay their rent leading to legal costs to have them removed
  
•     Squatters moving into an empty house leading to legal costs to have them removed
  
•     Partner with cash withdraws or passes away
  
•     Rehab costs shoot up due to unforeseen structural defects
  
•     Buyer insists on you bearing closing costs and you have no other buyer
  

There are 101 reasons why you need a real estate emergency fund to fall back on so that your real estate business can not only survive a setback, it can also turn that setback around.  So that you are bigger, stronger, better prepared to flourish and prosper and take whatever unexpected surprises that comes along in your way.