What is a reserve fund?

In property management, a reserve fund is cash the manager holds back from an owner's funds to pay repairs and bills that come up between statements, usually a fixed amount set in the management agreement. In condominiums, strata corporations and HOAs, a reserve fund is a separate, longer-term fund for major repairs to common property.

Two meanings

Owner reserve. The manager keeps a set amount, for example $500 or $1,500 per property, in the owner's account. Repairs are paid from it without waiting for rent, and it is topped back up from the next rent before a distribution is made. This is the meaning used on an owner statement.

Association reserve. A condominium corporation, strata corporation or homeowners' association saves for roofs, elevators, paving and other major replacements. Many jurisdictions require these funds and set rules for studies and contributions. In British Columbia, for example, a strata's fund is called the contingency reserve fund. Owners pay into it through their monthly fees.

Worked example: an owner reserve

Reserve target $1,500, 8% management fee on rent collected.

Month 1Month 2
Rent collected$2,400$2,400
Management fee- $192- $192
Expenses- $2,600 (water heater)- $150
Net for the month- $392$2,058
Reserve top-up$0- $392
Distribution$0$1,666
Reserve at month end$1,108$1,500

In month 1 the reserve covered the $392 shortfall, so the water heater was replaced without asking the owner for money. In month 2 the reserve was refilled before the distribution.

Common mistakes

  • Changing the reserve without telling the owner. It looks like money went missing.
  • Not showing the target and the balance on every statement.
  • Confusing the reserve with tenant deposits.
  • A reserve too small for the building. An older property with original systems needs more.

Related terms

  • Owner statement: An owner statement is the report a property manager sends to each property owner, usually monthly.
  • Owner distribution: An owner distribution is the money a property manager pays out to a property owner from the funds held for them, after expenses, fees and any reserve have been covered.
  • Repair approval limit: A repair approval limit is the most a property manager may spend on a single repair without asking the owner first.

Further reading