To calculate how much your emergency fund should hold, add up the following expenses for all of your properties:
- Monthly mortgage payments
- Insurance premiums
- Condo fees
- Operating utilities
(Notice that I did not include repair costs or service fees, because if the money train stops moving, the first thing to get cut is the gardener and nonessential fixes. You should,
however, always include utilities because you have a legal obligation to keep the lights and heat on even if the tenant fails to pay rent.)
If you have 10 or fewer units, take your monthly costs and multiply that number by three. Then cut the total in half. That’s the minimum amount you should keep in your emergency fund.
Or, to express that as a formula …
Monthly expenses for all units x 3 / 2 = minimum emergency fund
Let’s say the PIT! (principal, interest, taxes and insurance) on my four units, along with the various fees and utilities, costs a total of$12,000. If multiply that by three, a fully funded, three month emergency fund would be $36,000.
However, since all four units won’t need repairs or experience vacancies at the exact same time, I can cut that figure in half. My minimum emergency fund should contain at least $18,000.