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Why You Should Set Up a Landlord ‘Rainy Day’ Fund

For many of us, maintaining an investment property requires serious effort. We all understand that the investment will pay off in the long term, but for now there are mortgage repayments, council rates and maintenance to take care of – and the rental income doesn’t always cover those costs.

If you’re in a similar position, setting aside even more money for a ‘rainy day’ might sound unrealistic and even unwise. But having funds in reserve can help you avoid financial stress and maximise your rental returns. Here’s how.

What is the rainy day ‘rule of thumb’?

Many financial advisors recommend landlords set aside three to six months’ worth of maintenance costs to cover any expenses that may arise. (Learn more about calculating monthly maintenance costs here.)

Whether you choose to set aside three or six months’ worth depends on your cash-flow position and your appetite for risk. Some experts put it this way: a three-month reserve covers you in normal circumstances while a six-month reserve takes into account rare occurrences.

Of course, the rainy-day rule of thumb is just a guide. Some landlords may only be able to set aside one or two months’ worth of maintenance costs, while others may choose to keep even more money in reserve. But the general principle is consistent: having a buffer helps reduce risk.

When might a rainy-day fund come in handy?

Many landlords figure out the cost of property maintenance on an annual basis, then divide that figure by 12 and try to budget for the smaller sum each month. This approach has two main weaknesses, however.

Firstly, property maintenance comes in all shapes, sizes and costs. Some maintenance requests may cost less than your monthly budget figure, but others (for example, replacing a broken hot-water system) may cost more.

Secondly, maintenance expenses are rarely spread evenly throughout the calendar year. For example, depending on the climate, you may find yourself responding to more requests in a particular season. It is also common for tenants to ‘save up’ non-urgent maintenance requests and then submit them at the same time as a single more urgent request.

In both these instances, a rainy-day fund can prove useful.

What are the long-term benefits of a rainy-day fund?

In addition to helping you month-to-month, keeping a rainy-day fund has two significant long-term benefits that may make you both happier and wealthier.

The first benefit relates to your relationship with your tenant. By keeping a rainy-day fund and responding to maintenance requests quickly and comprehensively, you can improve the likelihood that your tenant is satisfied and will remain in place for the long term.

A long-term tenant means stable rental income and fewer expenses associated with re-letting your property. Long-term tenants are also more likely to take good care of your investment. Over time, all this adds up.

The second important benefit is greater peace of mind. If you have a rainy-day fund, you can rest easy in the knowledge that you are unlikely to face stressful financial situations relating to your investment property. Less stress is never a bad thing!

Enhancing your sense of security

Unexpected costs are a reality for all landlords. And they’re not just maintenance-related: your property might suffer damage, internally or externally, as a result of tenant behaviour or other events beyond your control.

In addition to establishing a rainy-day fund, consider signing up for either landlord insurance and building insurance.


Insurance issued by AAI Limited ABN 48 005 297 807 AFSL 230859 trading as Terri Scheer. Read the Product Disclosure Statement before buying this insurance and consider whether it is right for you. Contact Terri Scheer on 1800 804 016 or visit our website at www.terrischeer.com.au for a copy. The Target Market Determination is also available.

The information is intended to be of a general nature only. Subject to any rights you may have under any law, we do not accept any legal responsibility for any loss or damage, including loss of business or profits or any other indirect loss, incurred as a result of reliance upon it – please make your own enquiries. This article has been prepared without taking into account your particular objectives, financial situation or needs, so you should consider whether it is appropriate for you before acting on it.

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