Avoid Financial Stress with a Vacation Home Reserve Fund
By Wren Lanier
Home ownership can be wonderful and satisfying—but also expensive. Unexpected repairs, broken appliances, and damage from weather events can create financial headaches for any homeowner if you aren’t prepared for them. That’s why Plum recommends that anyone owning a vacation home have a reserve fund available to handle unexpected expenses, and avoid financial stress.
What is a reserve fund?
A reserve fund is a pool of money designated for home repairs & irregular expenses. Your reserve fund can be kept in a separate bank account, such as a savings or money market account, or it can be a balance maintained in the primary operating account for the property. (We prefer a separate bank account!)
How much money should a reserve fund have?
We use a simple formula to calculate the right amount for a reserve fund.
- Start with 3% of the price of the house
- Add a balance equal to 1% of the value of the home each year
So a home purchased for $500,000 should start with a reserve fund of $15,000. Each year the owners should add an additional $5,000 to replenish the account as money is spent. If after several years the balance of the reserve fund exceeds the amount needed, the excess money can be moved to a capital expense fund to be used for future upgrades to the property.
How do I create a reserve fund with multiple co-owners?
A reserve fund is especially important when co-owning a home so that unexpected expenses can be handled fairly and with a minimum of stress. It’s also important for tax purposes that expenses related to a property be distinct from owners personal finances.
Each co-owner should contribute money to the reserve fund at purchase, then add additional contributions on a monthly or quarterly basis. The amount of money contributed should be proportionate to the share of the home they own. Someone who owns 50% of the home purchased for $500,000 would contribute $7,500 to the reserve fund as soon as the home is purchased, then add an additional $2,500 annually. A $2,500 annual contribution would mean a monthly deposit of $209 or a quarterly deposit of $625 to the reserve fund.