You need a contingency fund. Now that you’ve been told that for the billionth time, the next thing you probably want to know is how big should your contingency fund be? Here is how to figure out how much to put into your reserve fund, just in case the project comes with unexpected (expensive) issues concerning plumbing, foundation or something else.
For Small Rental Houses
If you invest in rental houses, the general rule of thumb for a small one is to add 10 percent. Add a bit more money to your contingency fund though if the property is in poor condition.
For Small Flip Houses
So you want to be smart about your flip? If the house seems in good shape, add 5 to 8 percent. That money gives you room for anything to go sideways, such as an electrical problem you never thought you’d uncover.
For Bigger Renovations
Go with 10 percent. While you could probably be fine with 8 percent, it’s best to add a bit more cushion for the “just in case” reason. If you have the funds, do it. That way if the reno ends up being $80k rather than the initial $60k you had projected, you’ll be fine.
Allowing yourself a bit of a cushion with a good-sized contingency fund can provide you peace of mind during your real estate project, regardless of its size. Use the above-noted tips for your next project.