Why you should keep a property investment reserve fund
Most property investors will stash away a certain amount of cash in reserve. That way, they can deal with any unexpected property expenses that come their way.
Let’s take a look at why it pays to keep some funds for a rainy day.
Property repairs and maintenance
How much you keep in reserve for repairs and maintenance largely depends on the size of your portfolio – and the age of the properties you own.
On the whole, modern properties will require less maintenance, whereas the general upkeep of an older one can be more expensive. An older property is more likely to generate significant repair costs such as the replacement of a roof or the installation of a new central heating system.
If you’re renting fully furnished properties, you’ll also want to take into consideration the replacement of white goods such as fridges, freezers, ovens and washing machines. You could also include the cost of replacing carpets and redecorating.
When a tenant leaves, there’s inevitably a period when a rental property will be empty before the next tenant moves in.
During this time, you need to remember that you’ll still be paying the mortgage as well as council tax and utility bills. Therefore, your reserve fund should be sufficient to cover void periods across all your properties.
How much should be in your reserve fund?
The size of your reserve fund will very much depend on the factors we’ve looked at. Roughly speaking, you should choose to keep about 10% of annual rent per property in reserves for maintenance and repair work.
If you’re worried about void periods, then try and work out how much you need to cover the costs of having a property empty for a month. According to ARLA, the average void period between tenancies in the UK is three weeks. 1
Essentially, the size of your reserve fund is going to be dependent on the size of your portfolio. You may decide to keep a separate reserve fund for each property as some may be older than others; and certain locations could be prone to having longer void periods than others.
Use all your knowledge of the properties you own to decide what’s an appropriate amount to keep in reserve for each.
If you don’t have a reserve fund
A reserve fund acts as the operating capital for your property investment business.
It makes sense to use some of your cash flow to create a reserve fund for each property. By setting aside an amount from each month’s rent, you can build an emergency fund that will be continually topped up by these deposits.
If you don’t have a reserve fund, you may find yourself struggling when faced with a large repair bill or an unusually long void period. And in a worst-case scenario, you could end up being forced to sell your property – and if you haven’t been able to carry out significant repairs – selling it for a reduced price.
Would you like to learn more about property investment?
At PMA we run a Mentoring Programme to show you how to invest in property as well as a range of courses aimed at beginners and seasoned property investors.
Keen to discover new property investment strategies?
Then register for our Introductory Property Foundations Course
3 Days and 12 Strategies
The Property Foundations course will help you understand the different property investment strategies you can use in today’s property market.
Dates: 20, 21 & 22 July 2018
Venue: Park Inn Hotel, Heathrow
Pre-register for your early-bird ticket here and receive up to 30% off