Reserve Funds: Why They’re Important and How to Save

a reserve fund is the best way to cover expenses before they happen

The great Yogi Berra once said, “it’s tough to make predictions, especially about the future”. And that’s true! Life can be unexpected. We can’t see the future and can’t know what will happen a day, month, or year from now. That’s why it’s important to be prepared.

Emergency maintenance is every owner’s worst nightmare. Having an appropriate amount of reserve funds set aside in advance is essential and helps mitigate the headaches and financial stress that unexpected maintenance may bring.

What to Consider When Planning Reserve Funds

There are several factors to consider when deciding how to structure your reserve fund. Things like the age of the building, the kind of materials used in construction, the climate, and the buildings location all factor in to possible expenses. For example, an older house will probably need more maintenance than a house that was recently remodeled. Similarly, a house surrounded by trees is more at risk for tree damage than one in a city.

Expenses can be unpredictable. A large reserve fund would be a good choice helps you play it safe and avoid excess expense.

Consider all the possible risks to your property like the ones listed above. Make a reasonable estimate of the cost of the most likely scenarios. Then double it. This ensures you can handle whatever challenges you encounter.

Mark Melsness, Investor, Property Manager and Managing Broker recommends that investors put 6 months’ debt aside to start.This is a great option for more risk-averse investors. Having 6 months’ debt stored in a reserve fund is also helpful if you plan on acquiring another property. Before lending to you, many banks like to see 6 months of expenses set aside. 

For new real estate investors looking to get into the game, a down payment is only part of the picture. Make sure you have enough cash on hand for a healthy reserve fund. Otherwise, you could find yourself scrambling during a vacancy or when you need to replace a septic system.

Contact us to start a conversation on this and other ways we can come along beside you to reduce your risk, increase your portfolio, or find the best way to market your investment property. Fill out our contact for here or give us a call at 253-830-5160. 

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