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.
