6 Essential Steps to Establish Your SFR Emergency Fund

Have you ever watched a trapeze act? Performers dazzle crowds with their impressive aerial feats. They balance, swing, and fly through the air! These acts are entertaining no matter what, but some feel the need to up the ante by removing the safety net. The tension – and entertainment – comes from the knowledge that a single mistake could mean serious injury…even death!

As impressive as this can be, it’s also incredibly unwise. Everyone needs a safety net. If you don’t have to, why would you put your life at risk? The same can be said for our livelihood. As investors, we have nothing to prove and everything to lose by working without a safety net.

Ensuring an adequate emergency fund is crucial for SFR investors to manage unexpected expenses and economic downturns. Here are six simple steps for bolstering your financial back-up plan!

6 Steps for Building an Investing Emergency Fund

Step #1 – Calculate Necessary Reserves

How much cash do you need in your emergency fund? Generally speaking, investors should set aside 3-6 months of operating expenses. What does that entail? Mortgage payments, property taxes, insurance, maintenance, and utility costs. Additionally, you want to account for potential vacancies. The rule of thumb is to save a month or two per year of your rental income per property. After all, vacancies can be expensive.

Step #2 – Make Regular Contributions

Make sure you always know how much money you have set aside. A solid safety net demands regular contributions. The best way to do this is to allocate a percentage of rental income (we suggest between 5-10%) to contribute regularly. Automatic bank transfers help remove the mental load of remembering to do this. Once you meet the set amount, put that money to work elsewhere.

Step #3 – Get Serious About Budgeting

We get it – no one enjoys budgeting. However, in real estate investment, accuracy is critical. Create a detailed, thorough budget for each property. Don’t guesstimate – costs can vary by market. You want to cover regular expenses, unforeseen repairs, and maintenance costs. Remember when appliances and other elements (such as roofs, siding, pavement, etc.) are due for replacement.

Budget for each of your properties. Keep these separate from your personal budgets, but include them in the overall picture of your finances.

Step #4 – Maintain Adequate Insurance Coverage

We won’t pretend that insurance isn’t a pain. It might feel like throwing money away if you never have to make a claim. The good thing about insurance is that it turns unexpected costs into something predictable. You know how much you’ll pay for your premiums. You know what your deductible is. So, when that tree falls on your roof, you can better gauge its replacement cost. Uninsured, your finances could be seriously wrecked by an unexpected expense. 

Maintain sufficient coverage so you can mitigate the financial burden of significant repairs. Additionally, consider liability insurance. This protects owners from potential lawsuits and contentious residents.

Part of your strategy, then, is to assess the insurance demands in your individual market. Shop around. Consider unique risk factors. Insurance needs aren’t universal.

Step #5 – Conduct Regular Reviews

Unfortunately, financial information doesn’t stay the same. Costs ebb and flow. Investors must review their emergency funds and their budgets versus actual financial information. You may find you’re saving too much or too little. Update your strategies and target amounts as market conditions change. For most, an annual review is frequent enough.

If you’re just starting, you may want to revisit your finances – emergency fund included – more frequently. Maybe you want to check in every quarter or every six months. Go based on your comfort level and performance history.

Step #6 – Seek Professional Advice

Finally, hunt down a professional. Financial advisors and real estate professionals can help you optimize your safety net. They can ensure your numbers are accurate and reasonable and that you’re prepared for eventualities. A trusted professional can be instrumental in getting your investments on track and keeping them on that way.

At the end of the day, knowing how to properly construct an emergency fund keeps your investment running smoothly. And that means less headaches and more success!

By implementing these strategies, SFR investors can create a robust financial safety net, ensuring they have the necessary funds to handle unexpected situations and maintain portfolio stability.

Ready to invest but worried about risk? Let your REI Nation advisor help!