Reserve Fund: What Investors Should Never Do Without

Reserve Fund – What Investors Should Never Be Without

invest in real estate with a reserve plan

I’m sure we’ve all heard the expression “Save for a rainy day”. Establishing a cash reserve is a smart decision that everyone and every business should implement.   Real estate is no exception.

For those learning how to invest in real estate, a reserve fund, also known as Contingency, is an account set aside to meet any unforeseen costs that may arise in the future. It also covers the future costs of upkeep requirements you know will happen, but you’re not sure exactly when they will occur.

These building components are called capital expenditures. They include tasks such as replacing a roof, replacing a heating, ventilation, and air conditioning (HVAC) system, or resurfacing a parking lot.  They all have a useful life span so you typically know approximately how soon they will need replacing.

A reserve fund is not designed to cover small repairs and maintenance activities like fixing a door hinge or replacing light bulbs. These minor costs should be captured under the operating expenses.

A reserve fund provides the owner flexibility to address emergencies that can be expensive, without affecting the ability to pay for routine expenses. It also allows the owner to pay for large expenditures without having to take on additional debt to pay for them.

If you are learning how to invest in real estate, I think you can see why establishing a reserve fund for a property is so important. When analyzing a property Marc and I always factor in a reserve. This way, when something come up we have the funds available to take care of it without taking on any more debt to pay for it.

Many lenders (i.e. banks) will require a reserve fund to be set aside in escrow to cover any major capital expenditures over the term of the loan. Hence it’s always important to include those figures in your underwriting exercise.


Does management think the tooth fairy pays for capital expenditures?Warren Buffet


As you learn how to invest in real estate, one thing to keep in mind is that some sellers and listing brokers may intentionally exclude reserves from a proforma in order to put the Net Operating Income in more favorable light, and thus improve the property’s valuation.

That is why as buyers it’s so important to do a thorough due diligence on the property’s financials.

We need to take into account all possible expenditures when underwriting a property’s. Using conservative numbers is beneficial here as it gives you more wiggle room. Excluding them can significantly impact the valuation and potentially your profits.

How much money should be set aside for a reserve fund is dependent upon the age and condition of the property, as well as the investor’s exit strategy. Regardless of your strategy, a reserve fund must always be considered and investors need to incorporate it in their analysis.


If you want to learn more about how investing in real estate can benefit you, drop us a line.

Remember, real estate doesn’t have to be complicated.

With Simple Acquisitions, it’s smart and simple!

Marc Dupuis

About Marc Dupuis

Marc got the real estate bug in his early twenties, and it’s never left. He has multi-faceted experience dealing with real estate investment companies. Marc’s is what you can call a real estate jack of all trades. He’s been an investor, landlord, property manager and builder in the Ottawa area since 1996 when he bought his first income property. He has since acquired a dozen income generating properties. He’s brokered property purchases for friends. He’s a partner in a commercial building and has built several new homes. His most recent build was featured in the May 2012 edition of Ottawa Magazine Marc manages the research and acquisition activities for Simple Acquisitions, LP. He creates strategic alliances with financial institutions, property managers, brokers, attorneys, contractors, developers, and real estate investment companies on a daily basis. Marc is also the liaison between the company and its private lenders. Marc has an innate ability to see the end result when nobody else can. He’s known for bringing all the necessary resources together to achieve his goals. He loves to talk to aspiring investors and provide education and guidance where he can. He even sent a laptop to an unemployed man that he met at a gas Station in North Carolina who was down on his luck, in the hopes that it would be a tool that could help him learn about way to make a living.
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