Emergency Savings for Rental Property Management

Andy should maintain a separate emergency fund covering 3 to 6 months of rental property costs.

### Emergency Savings Strategies for Rental Property Owners
* 🏡 Andy inquires about emergency savings for his duplex, emphasizing the **importance of financial preparation** in real estate investing.
* 💰 Many aspiring landlords believe having **3 to 6 months of living expenses saved** is sufficient, but this may not cover the **unique costs associated with rental properties**.
* 📅 It's essential to have a separate emergency fund that can sustain the property's costs during potential vacancies, with a recommended coverage of **3 to 6 months** based on local market conditions.
* 🔍 Investors should assess their property's systems, like HVAC and plumbing, and create a **replacement schedule** to avoid **unexpected expenses**.
* ⚠ Past experiences, such as the Great Recession, highlight the **risks of over-leveraging** and the **need for caution** when scaling rental properties.
* 💸 Successful investors often navigate challenges by being **prepared for economic downturns**, which can significantly impact **cash flow and property maintenance**.
* 📈 Ultimately, treating rental properties like a business and planning for both **positive and negative scenarios** can lead to **long-term success** in real estate investing.

[Music] This one's from Andy's cool SN. We could just call him Andy. Do you have any recommendations or quick calculations for emergency savings for a rental property? I own a duplex with separate hot water and furnace and AC. Also, how much excited is so excited. Love it. Had to throw that in there. Um, man, this is a great question 'cause people ask us this all the time. Hey, I really want to get into rent, uh, real estate. It's something that I'm passionate about. It's something I feel like I have an eye for, or maybe I've fallen backwards into it. I've owned a home, and then I upgraded and bought a new home, and I'm trying to figure out how do I do it. Well, well, a lot of people think, Hey, I've been working through the financial order BR. We hold the thing up. I've been doing the financial order of operations, and I got to step four, and I have a fully funded emergency fund. I have 3 to 6 months of living expenses, so

so long as I have that, I'm probably covered when it comes to rental property, isn't that right? Well, probably not. I think that the answer to Andy's question is, as any good financial adviser will tell you, it depends. It depends on your unique circumstance. But this is what we love to see happen. We love that when someone has a rental property, you know, because we all think about, Man, it'd be great if I had a tenant in there and the tenant covers all the costs, and then I have free cash flow. But what happens if that tenant's not in there, or what happens if you go through 2, 3, 4, 5 months of vacancies? I would like to see Andy in your situation. You have an emergency fund that can carry the cost of a vacant property for a reasonable enough time for you to get another renter in there. Now, your market will dictate, Is that three months, four months, five months, six months? Because what you don't want to do is something goes wrong, you have an emergency that happens in

the house, and then the renter moves out, and now you literally can't afford to cover the floor cost of that property sitting there vacant. So, in my opinion, Brian, I'm curious if you agree. When it comes to rental properties, you ought to have a separate emergency fund, and depending on your cash flow, it should probably be somewhere between 3 to 6 months of the float cost for the rental property. Yeah, here, let's even add it a little bit more. This is why I always say residential rental or any rental property is Step 8 of the financial order of operations, and part of this, and I want you to treat it like a business, is that yes, there are probably, you look at your marketplace, figure out how long that place sits vacant. Is it 3 months? Is it 6 months? And make sure you have that carry cost covered. But then I want you to go a step further. We did this on our commercial property. Is it go look at all your systems? Are you going to, how old is the

air conditioning unit is that you know what's your maximum exposure if you had to replace that AC. What about your hot water heater? Go through all the different systems on the house and try to come up with a quick schedule of when it's going to be replaced and then just plan accordingly. 'Cause things happen, you know, like especially if you're like on a septic tank, if this is out in the country someplace and not on sewer, that's expensive too. I mean, and these things find out when the last time that was cleaned out. These are all things that you should do as part of the due diligence of getting into residential rental and treating it like a business so that you don't get caught flat-footed. 'Cause yeah, it can be great, it really can, but even great investments are going to require some work and they're going to require some capital to keep them humming and working when you have these things pop up. I think it's interesting because you've prepared in your previous life.

you prepared taxes a ton, and I think we get a bad rap because people assume that we do not like rental property, we don't like residential rental, but that's not true 'cause you've seen tons of people who have done it successfully, but you've also seen people who have cut that mark way too thin and got themselves in trouble, right? Yeah, what typically where I saw it recognize, I, you know, I've been doing this long enough that I got to go through the Great Recession and then the aftermath of that, and there's so many people who are trying to scale with residential rental where I had a gentleman who was very successful in a financial sector, and he got into residential rental, and I think he was up to 45-50 homes. That sounds wild, I know, but these were low price point homes, and it was working. I mean, on paper, he was worth a lot of money pre the Great Recession, but then the problem happened when we hit the Great Recession 'cause the

problem with lever leverage debt is that um when the people quit paying rent and then all of a sudden the people started you know tearing up stuff because you know there there's they're upset about the economy they're upset at the landlord there's just a lot of bad things going on if you bring all those things together the lack of rent payments plus people then now tearing up the these things and then the banks being in a position out where they want their money because they're under their own pressure it it created um a lot of stress a lot of hardship um and pretty much came close to to Breaking this person and that's why I just tell you be careful because uh you see it all over social media they'll say hey I did a flip or I did this rental property and I made and I'm getting cash flowing $1,000 extra a month this is going to be if I do this 30 times I could be making 30 grand a mon they the simple on it but and I guess in

that moment in time. Yes, it could, but also do the reverse side of that and say what happens if you load up and you get all these rental properties and then things just don't go the way they're supposed to. That doesn't mean, 'cause by the way, if you survived it, 'cause let me tell you, I have another client that actually bought all their properties during the Great Recession. Whole Le cow, their balance sheet of their net worth statement looks incredible if you think about what they got some of these houses for with a cash flow now and now with a, you know, the appreciation from the investment. So, it's just the making sure that you can weather all storms so you get to be the positive side of that versus being the one that had to unload all of your properties at the worst of time and break you.

How Big Should Your Emergency Fund Be for Rental Properties?

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Having a fully funded emergency fund with 3 to 6 months of living expenses may not be sufficient for a rental property.

It's important to have an emergency fund that can cover the costs of a vacant property for a reasonable period, depending on the local market.

This fund will help you manage potential vacancies and unexpected expenses associated with the rental property.

Managing Financial Risks in Rental Properties

Having a separate emergency fund for rental properties is crucial, ideally covering 3 to 6 months of the property's float cost.

It's important to assess the potential vacancy period and plan for carry costs, as well as to evaluate and schedule the replacement of aging systems in the property.

Treating residential rentals like a business and conducting thorough due diligence can help mitigate unexpected expenses and ensure a smooth operation.

Many tax professionals have seen both successful and troubled cases in residential rental property investments.

A notable example is a man who owned 45-50 low-priced homes and appeared financially successful until the Great Recession hit, leading to a loss of rent payments and property damage.

The combination of these factors, along with pressure from banks, created significant stress and hardship, highlighting the risks of leveraging debt in real estate.

Investing in rental properties can be risky, but it can also lead to significant financial success.

Some investors thrive by purchasing properties during economic downturns, benefiting from low prices and strong cash flow.

The key to success is being prepared to weather financial storms and avoiding the need to sell properties at the worst possible time.