Homeowners should expect to pay at least 1% of the value of their home per year on property maintenance. Landlords should expect to pay more than this to compensate for unexpected tenant-related maintenance costs.
Having some reserve funds on deck as a landlord is always a good idea. Property maintenance can get expensive, especially if you have some troublesome tenants or an older building.
Part of your overall property management strategy should be establishing a cash reserve fund to finance unexpected maintenance issues that arise. Read on to find out why you should do this and how.
Why Have Reserve Funds?
Murphy's Law of: "If it can go wrong, it will." is a good guiding tenant when dealing with your rental properties. Imagine if your roof caves in during a winter storm, or part of your building burns down.
Having some reserve funds on deck to cover repair costs is essential when waiting for an insurance claim. Don't neglect to do so.
Otherwise, you could be stuck footing the bill for your tenants' hotel rooms if you are found liable for their displacement. This is a landlord's nightmare.
How Much Should I Have?
If you have between 5-10% of your property value in reserve funds for maintenance emergencies you are doing great. Anything less than that opens the door to potential problems if an emergency happens.
You can use this fund as your overall maintenance budget, not just for emergencies. That said, make sure to reinvest money back into it.
How to Finance Reserve Funds
There are a couple of different options you have to finance your reserve funds. Most have to do with re-investing some of your profits from your rental. Let us examine a few so you can select your best.
You can use all or some of your tenant's security deposits to pay for your maintenance reserve account. Theoretically, if your tenants leave the place in good working order, you won't need to spend much on maintenance.
You can increase your tenants' rent a bit to pay for your reserve funds. Then deduct a percentage each month from your profits to bolster your account.
Home Owners Association Fees
If your properties' have a homeowners association, you can take some money out of their monthly dues for your reserve fund. If there is no HOA you may want to start one to make HOA reserve funds.
As a last resort, you can re-invest some of your take-home money from your property into your reserve funds. This is not the best option, but better than not having any source of funding for maintenance emergencies.
Keep Some Funds in Reserve
If you don't have reserve funds for property maintenance, you are putting yourself and your tenants in a precarious situation. Make sure that you have all your bases covered by having an ample supply of cash on hand if needed.
If you want someone else to handle establishing your maintenance reserve funds, or all other aspects of your property management contact us today. We are professionals that get the job done so you can focus on living your life.