How do you know how big your reserve fund for rental properties needs to be?
The most successful buy-to-let property investors are prepared for all possibilities. They invest in and operate their property portfolio to a set formula. It can be summarised as:
- Buy in the best places to invest in property UK
- Find the best tenants
- Use investment property management services to remove landlord stress
- Be a good landlord
- Always be prepared for emergencies
There is, of course, a lot of detail in this five-step buy-to-let process. For example, you’ll need to consider cash flow, buy-to-let mortgages, tenant vetting, repair and maintenance processes, etc.
In this property management blog article, we’ll discuss an essential strategy that will help you always to be prepared for emergencies: the reserve fund for rental properties. You’ll learn why you need a reserve fund, and the four factors to consider when deciding how big your reserve fund needs to be.
Fact #1: A reserve fund is essential
You (or your property manager) get a call from your tenant at silly o’clock in the morning. The heating has stopped working. The property is freezing. In the morning, you send a plumber to assess the situation. He tells you that the central heating system needs replacing. The boiler, pipes, and half the radiators are shot to shreds.
If you don’t have the funds to handle an emergency like this, you could put your entire property portfolio at risk. The heating doesn’t get fixed. Your tenants move out. Now you must pay the mortgage, utilities, and council tax out of your pocket. And you can’t get new tenants – there’s no heating. How long do you think it will be before the lender repossesses your investment property?
If only you’d built up a reserve fund for your rental property, you’d still be in business.
The question is, how big does your reserve fund need to be? If you don’t have enough cash put by, a small emergency could quickly escalate quickly. Before you know it, you’re dealing with a financial crisis.
Fact #2: The size of a reserve fund for properties depends on the size of your portfolio
To figure out how big your reserve fund should be, the first consideration is how many properties you hold in your investment portfolio. Some investors prefer to keep a separate reserve fund for each property. You don’t have to go this far. However, each property will have a different reserve fund requirement. It’s important to apportion some of your positive cash flow to building up an appropriate reserve fund for each property.
Put a set amount of your rent into a reserve fund each month. If you need to draw on these emergency funds, they’ll be replenished by these deposits. Building up a reserve fund is good cash management. You’re saving today for tomorrow’s maintenance needs or seeing you through an unexpected void period.
Fact #3: The size of a reserve fund for properties depends on the age of your properties
Older properties are more likely to need major maintenance and repairs. Roofs and central heating systems have a limited lifetime before they need replacing. Appliances and Kitchens need to be updated.
Generally speaking, the cost of maintaining an older property is higher than that of maintaining a new property. It is why so many property investors buy new build or off-plan property.
Fact #4: The size of a reserve fund for properties depends on other running costs
Every property you own will have a baseline of running costs. Items that have to be paid, even during void periods. If your property is empty, how will you pay these costs? Such costs include:
- Mortgage interest
- Council taxes
- Utility bills
- Service charges
You may also need to pay for general maintenance and professional cleaning to prepare the property for your next tenants.
It’s essential to have enough cash in reserve to pay these costs between tenancies. Figure out how much these costs are in total every month. Then put by at least two months’ worth of these baseline expenses. Eight weeks should be more than enough to find new tenants. In fact, most of the properties we manage for landlords are tenanted within two weeks.
Keeping a little extra in reserve gives you peace of mind. It makes certain that you can cover your costs in the event of prolonged repair work between tenancies. ‘It’s better to be safe than sorry’ is a mantra which all buy-to-let investors should observe.
Fact #5: The size of a reserve fund for properties depends on your investment plans
If you’ve got plans to expand your property portfolio, it might be wise to inflate your reserve fund. Mortgage lenders look more favourably on investors who are financially prepared for emergencies.
However, never use any of your reserve fund towards the deposit for your next investment property. The reserve fund is there to protect your property portfolio, not expand it. If you deplete your reserve fund by using it as a deposit, you will be:
- Increasing your risk (more properties = more things that can go wrong)
- Decreasing your protection (fewer funds to cover emergencies)
Are your reserve funds adequate?
Remember, a reserve fund for rental properties is an investment itself. Its job is to provide protection when it’s needed. It will pay for emergency repairs and maintenance. It will cover your expenses during void periods.
Assess your property portfolio today. Have you got enough funds in reserve? Would a major repair need put your buy-to-let finances in a tailspin?
If you’re unsure of what size your reserve fund should be, contact one of the Ezytrac team today on +44 1522 503 717. We’ll help you calculate how much emergency cash you need to protect your properties and your property portfolio. And we’ll be on hand to help you review your needs every year, and as you grow your property portfolio.