Whenever the term “reserve funds” is brought up, the first thing that comes to most people’s minds is extra money saved for a rainy day. However, in the property management industry, the term is used a bit differently. While the core definition remains the same, reserve funds are used for anything related to property maintenance and repair costs.
For example, if a property’s roof starts leaking, the property manager will likely dip into the reserve fund to cover the cost of the repairs. For this reason, many property managers or owners go the extra mile to pool a reserve fund. Otherwise, their investment will be left vulnerable to unforeseen repairs or maintenance issues, lowering their value. Beyond that, few people know how reserve funds work, so we’ll discuss the details in this article.
How Much Reserve Funds Should You Have?
Ideally, a property owner should have at least 3 to 5 years’ worth of reserve funds. This is because repairs and maintenance can be costly, and it’s not always possible to predict when they’ll occur. Property owners can avoid having to take out loans or dip into other investments to pay for repairs by having a reserve fund.
While having 3 to 5 years’ worth of reserve funds is ideal, it’s not always possible. In this case, property owners should have at least a year’s worth of reserve funds. This will help to protect their investment in case of any unforeseen repairs or maintenance issues.
Building a Reserve Fund
There are a few different ways that property owners can build reserve funds. The most common method is to set aside a certain amount each month. For example, if a property owner knows they need to have $5,000 in their reserve fund, they can set aside $200 each month to reach their goal.
Another method is to set aside a certain percentage of the rent each month. For example, if a property owner charges $1,000 in rent each month, they can set aside 10% of that rent, or $100, to their reserve fund.
Finally, some property owners choose to set aside a lump sum of money each year to their reserve fund. For example, if a property owner knows they need to have $5,000 in their reserve fund, they can set aside $500 each year to reach their goal.
Why It Matters
As mentioned, reserve funds will be used for unexpected repair and maintenance costs. However, this is not the only reason why reserve funds are essential.
Reserve funds can also cover standard maintenance costs, such as painting the exterior of a property or replacing the roof. Additionally, reserve funds can be used to cover the costs of major renovations, such as adding an addition to the property or updating the plumbing or electrical system. Beyond that, reserve funds can also cover vacancy costs, such as when a property is unoccupied for an extended period.
Can You Use Your Service Charges and Sinking Funds?
If your property is a leasehold and you pay service charges and sinking funds, you may wonder if you can use your service charges and sinking funds for reserve funds. The answer is no.
Service charges are used to cover the costs of maintaining and repairing the common areas of a building. These common areas include the lobby, hallways, stairs, elevators, parking area, and other areas that a building’s residents share.
Sinking funds cover the costs of major repairs or improvements to a building. These improvements may include renovations to the common areas, new windows, or a new roof.
A reserve fund is necessary for any building’s financial planning because it ensures that funds are available to cover the costs of major repairs or improvements when needed. Building it will be challenging, but it only takes patience and time. Once you have it, you can save it for a rainy day to take care of your property’s needs.
California Builder Services provides top-quality reserve study services. We understand your home’s long-term investment value, so we develop comprehensive solutions to ensure you have a budget when circumstances call for it. Simply go to our website to request a proposal!