The Importance of a Savings Fund for Your Rental Property Business.
The income from a rental property, or an entire portfolio of properties, generates its own momentum. As long as you have another months’ rent coming in, you can easily cover the expenses needed to maintain your properties. However, the sudden need for large-scale repairs can completely throw off your calculations for both budget and profit.
Unexpected expenses may be difficult to cover unless you have carefully built up a savings fund with these types of problems in mind. Replacements and major repairs cost more than any single month’s profit margins. As an experienced property management firm, Leaf Management can help you build the right savings plan to ensure the strength and long-term profitability of your rental property business. Here’s how to plan financially for the unexpected.
The 1% Maintenance Rule
The first rule of thumb is the 1% maintenance rule. Every new homeowner should be advised to set aside approximately 1% of the property cost per year to cover maintenance and repairs. This amount should go into a savings fund – you won’t need the whole of it every year. Most years, little repairs will only require a fraction. But in five years, you will have saved enough for the inevitable major repair that may be needed.
Homes occasionally have quite large and sometimes unexpected expenses. The heater may go out one winter, or a bad storm might seriously damage the roof. setting aside 1% of each property’s value per year in your savings account can ensure you will usually have enough to cover a major repair for any of your rental properties in a given year.
Saving for Three Months of Expenses
Another useful savings strategy for a rental investor is to prepare for 3-6 months of expenses, just in case. What if a tenant leaves next year and it takes longer than usual to replace them? What if a costly major repair is necessary before you can resume collecting rental income? If the house becomes unlivable during a tenant’s lease, you may need to discount them a month of rent until the house is repaired and livable again.
Having a nice cushion of 3-6 months expenses can create that necessary margin and provide the funds you need for the next big repair or replacement cost. The larger your cushion, the more you can relax when unexpected setbacks, expenses, and vacancies occur.
Build a Major Maintenances Saving Schedule
You can also take a page from commercial real estate strategy. In commercial real estate, a maintenance schedule is used to predict major repair and replacement costs. For example, it will include both annual HVAC tune-ups and the inevitable system replacement 15-20 years after the current unit was installed. The schedule includes these calculations for every major system.
In the case of a residential investment owner, this would include the water heater, AC, heater, roof, plumbing, and so on. Knowing whWhy You Needen to expect these expenses can help you save up for when then inevitably need repair and eventual replacement. In fact, you might even have a replacement ready before a catastrophic failure occurs.
Diversifying Your Portfolio and Risk Exposure
Lastly, owning and renting out more properties can soften the impact when a single property needs a major repair. Let’s say you manage 10 rental homes instead of one. If one of those ten homes has a delayed turnover, the rental income from the other nine will help to cover the gap and provide for any unexpected expenses. You can also spread out your savings plan to pull a smaller percentage from the profit of each individual rental income.
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Smart Maintenance and Savings Planning with Leaf Management
Planning ahead is the best way to be prepared financially for the ups and downs of rental property investment. Savvy landlords and investors know that large expenses will happen eventually, and it’s best to have funds to cover them before the next surprise. Better yet, is to not be surprised at all by knowing the age and maintenance schedule of every major system in your investment portfolio.
Property management is more than just keeping tenants happy. At Leaf Management, we can help property owners build a smart savings plan to enjoy both rental income profits and prepare their business for the inevitable surprise maintenance expenses around the corner. For more insights into rental property business success strategi