Smart landlords know stuff happens—a tenant fails to pay the rent or the furnace fails—and suddenly the money spigot stops flowing. For retirees who rely on rental properties to generate a steady income, it’s a double hit to their wallets. Not only are they minus an income but they’re also still on the hook for all the expenses to maintain the property.
That’s why every landlord needs an emergency fund.The economic fallout from COVID-19 drives home the point: As tenants lost their jobs, many couldn’t pay the rent. Some landlords forgave the debt. Others offered to modify leases so tenants could repay over time.
Federal, state or local moratoriums temporarily prohibited evictions for tenants in arrears. Before it expired in July, the federal moratorium applied to properties with mortgages backed by Fannie Mae, Freddie Mac or Ginnie Mae, or to tenants who paid with housing vouchers. Some state and local moratoriums, which apply to rental properties owned outright or purchased with private money, ended earlier or were extended.
Congress has been at a stalemate over a new stimulus package. If the Democrats have their way, extending eviction protections for renters will make it into the legislation. Although Republicans have little appetite for another eviction moratorium, both parties support paying money directly to landlords to make them whole and protect tenants from running up huge debt, according to Tyler Craddock, governmental affairs director of the National Association of Residential Property Managers.
Whatever Congress decides, estate investors and property managers all agree—an emergency fund is essential. But they disagree about how much to set aside.
Hampton and Hampton property managers Kim Meredith-Hampton and her husband Scott Hampton, of Orlando, Fla., recommend a cash cushion equal to three to six months of mortgage payments for one property, assuming that if there are more, only one will be vacant at a time. They also suggest saving 5% of monthly rents for repairs and replacements. For properties the couple manages, they automatically deposit that amount from the rent collected each month into a trust account in their client’s name. The funds are kept separately from the tenant’s security deposit.
Because she feels bearish about the economy, Cynthia Meyer, a real estate investor and a financial planner with Real Life Planning in Gladstone, N.J., recommends saving up to a year’s worth of expenses, including mortgage payments, insurance, property taxes, marketing, utilities, services (such as property management, landscaping, pool and pest control) and any homeowners association dues. You should also set aside money for repairs and replacements—from 1% of the property value annually for a newer home to 4% for an older home. To build an emergency fund, Meyer recommends that each month you save any money left after covering property expenses until you’ve accumulated the target amount.
Where should you stash those reserves? Meyer recommends low-risk, liquid options like savings accounts, high-yield savings accounts, money market funds, Treasury bills or a ladder of CDs with maturities of three, six and 12 months. DepositAccounts.com lists the best interest rates for different savings vehicles.
Robin Voreis, a real estate investor and agent with the Voreis Team in Minneapolis, says a property should support itself from the get-go. “By virtue of buying it at a discount, or having a ton of equity to tap, or generating high cash flow when it’s rented, you can do without the rent for a few months,” she says.
As a backup, Voreis recommends having a credit card exclusively for the property or a home equity line of credit. With a HELOC, you pay interest only on money tapped during the initial withdrawal period, usually five or 10 years, and gradually repay the debt from the rent.
Because it’s harder to get a HELOC on an investment property, you could take one on your current home. If you plan to convert your home to a rental, it’s best to take a HELOC before you move out.
“You’ll have a pile of money at your disposal,” says Voreis.
Should I Trade Stocks or Options?
Answering the question "should I trade stocks or options" will depend on your own risk tolerance, investing objectives and understanding of market dynamics.
By Jared Hoffmann Published
This Is How You Can Be a Snowbird in Retirement
There’s a lot to consider, and warm weather shouldn’t be the only deciding factor. For instance, will you rent or buy? What’s the tax and health care situation?
By Tony Drake, CFP®, Investment Advisor Representative Published
5 Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Rates are high this year, but you can still find an affordable loan.
By Daniel Bortz Published
Does It Make Sense to Rent in Retirement?
Making Your Money Last Renting isn't right for all retirees, but it does offer flexibility and it frees up cash.
By Sandra Block Published
Dividends Are in a Rut
Dividends may be going through a rough patch, but income investors should exercise patience.
By Jeffrey R. Kosnett Published
10 Things You Need to Know About Retiring to Florida
Making Your Money Last If Florida is part of your retirement plan, we offer up a few tips to help you find your way.
By Bob Niedt Published
Retirees, It's Not Too Late to Buy Life Insurance
life insurance Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.
By David Rodeck Published
Bond Basics: U.S. Agency Bonds
investing These investments are close enough to government bonds in terms of safety, but make sure you're aware of the risks.
By Donna LeValley Published
Mortgage Rates and Payments Keep Rising, Creating Market Misery
Mortgages Current mortgage rates and payments continue to rise resulting in buyer demand stalling and housing sentiment at low levels.
By Erin Bendig Last updated
Bond Basics: Pick Your Type
investing Bonds offer a variety of ways to grow wealth and fortify your portfolio. Learn about the types of bonds and how they work.
By Donna LeValley Published