☔️ rainy day fund

Hi Fellow PC,

What is the general rule for extra amount to leave as wriggle room in saving as just a just in case for your IP's?

I was thinking 10k?? Would that be about right or does it depend on what kind of property ?

Matt

 

It probably depends on what makes you feel comfortable and sleep at night without worrying.
Personally I would want about a years rent sitting aside in an Offset for that property.
Recently one of our IPs needed a lot of work in the space of 4 weeks - a new hot water system, a plumbing issue fixed and a new shade sale that was damaged in a storm. That was 5k in the space of 4 weeks. It would have halved ur buffer in one go. You want to make sure you can easily cover things like this when they happen.

 

As a cash buffer, $25-50k. Covers major repair, extended vacancy etc.

My portfolio has its peaks and troughs for maintenance... and when its a peak they all seem to have issues at once. One month cost me over $10k in repairs over the portfolio. In the past 3 months I have had a gas central heating system had to be replaced, and 2 showers needing repair which was about $5k combined.

 

Does offset balance against PPOR count?

 

Yes but a seperate split against the PPOR to pay for investment related expenses will be more tax effective

 

I maintain $10k in each property account. Let it build back up when used.

That said, I'm quite conservative.
I strive for 12 months if all income stopped flowing.

I've dipped down below the 6 month mark previously. So it gives me peace of mind.

That comes with time though. When I first started I regularly had to borrow $1k from a friend every other month due to cashflow shortfall.

Took over 2 years before I reached a comfortable buffer.

 

Its different for everyone and every household. If your at 90% LVR's, on IO loans & have 6 properties and can't access refinance opportunities, you need a far larger buffer than a first home buyer. As @The Y-man mentioned, some of this is natural and happens over time as your portfolio grows.

Risk buffers per property is only one risk criteria. We've tried to develop a calculator to help people calculate different buffer sizes for different risk profiles.

 

Agree with the general consensus when they say it's different for everyone.

Even within families it can differ - one spouse might want to horde loads of cash in the offset while the other sees it as wasted opportunity.

Stick to whatever you feel most comfortable with.

Cheers

Jamie

 

Personally I reckon $100K per property would give me peace of mind. Each to their own. I'm at circa $40K - nowhere near enough.

 

We don't budget like that. $100K/property seems like overkill, assuming you have adequate insurance.

This year we were repainting one property, which was a few thousand. The painter was up doing the front balcony and said we should get someone to look at the beam. It was rotten through, that was a $9K unexpected outgoing!

Having said that, that was the first ever large 'surprise' expense in 20 years. We have had 2 month vacancies due to Xmas/new year periods a couple of times.

 

You're asking the wrong question IMO

It's not $X as a buffer but more of a Y time scenario.

Everyone has different holding costs, financial structures, risk appetite & cashflow positions... hence, any $X response in largely irrelevant.

 

The buffer requirements increase exponentially the larger your portfolio.

 

We always renovate and bring our properties up to newish internally and appliance/function wise before we put tenants in after we purchase to minimise maintenance. I’d say 10k would be plenty if it’s a well maintained house, again as someone else said half that would be fine if it’s well maintained and insured.
One of my properties is very old but we fully renovated it in 2016 before tenanting- it costs us $300 a year to blast the drain that tree roots block every year. We could spend 2 k to fix but don’t see the point at this stage when blasting does the job for a year and as we plan to eventually develop one day anyway. One of our other properties costs us $100 in maintenance in a year, and another has been a bit of a dog and has cost us about $1000 in unexpected costs in the past year. The killer is the council rates- feel like there’s one instalment due every week!
If it’s a brand new house or apartment I’d say 5k would be heaps.
Our PPOR we built 8 years ago- have been lucky to have to spend $500 on maintenance the entire time (touch wood)

 

But why $100K per property? What are you covering with your buffer?

 

Interest rates, job loss if applicable.

Say you have a $400K loan...Interest rates went up .5%. That's $20K right there. What if it keeps going up?

What if you had to make P&I payments on top of that? What if you can't renegotiate your rate, and can't refinance?

What if you lost your job or had a business downturn in addition to?

A $10 to $20K buffer doesnt even touch the sides.

 

I don’t get it. If rates go up .5% on IO that’s only 2k not 20k?

 

He means the entire repayment for the $400k.

I also budget for $0 rental income. It's a realistic situation.

I've had people not pay for 3-6 months before insurances kicked in when I first started investing.

As you grow your portfolios, you need larger buffers.

 

Oh okay.

 

400k loan =/= 400k p.a. in repayments

400k loan + 0.5% = 2k more p.a.

If you have 400k in repayments then your loans would be 8.88*M with a 60 LVR would mean your portfolio would be ~15M (80 LVR would be ~11M). I doubt many people would be at 80 LVR with a 11M portfolio however I can foresee people at 60 LVR (or less).

Which if your average yield was 3.5% (this would be conservative) you would be getting 525k in rent on the 15M portfolio or 385k on an 11M portfolio. Less 25% for expenses would be ~394k on 15M portfolio or 289k on 11M.

SO even with a 20k increase in repayments you shouldn't be having issues unless you are running already to close to the line (e.g. 80LVR on an 11M portfolio) and TBH if you have an 11M portfolio with 80 LVR it is probably a good sign to maybe slow down.