Property Management Blog

Property Management Blog

Rental Property Reserve Account: What Is It? And Why You Need It. By A Property Management Provider.

Jobe Peterson - Sunday, September 27, 2020
Property Management Blog

As a rental property owner, your most common headache when owning a rental property likely falls into one of these three categories; non-payment of rent, breach of contract, and maintenance for your rental property. Preparation is your key to success as a rental property owner. Whether your a newbie rental property owner or a seasoned vet, mitigating rental property issues & risk will keep you sane in your real estate investing journey and payout dividends if correctly set up. This article will be touching on why you need a maintenance reserve for your rental property. What is a maintenance reserve account for a rental property? Why you need a maintenance reserve account for your rental property? And how much should you set aside for your rental property maintenance reserve? 

What Is A Rental Property Maintenance Reserve? 

A rental property maintenance reserve account is a determined amount you have set aside for repairs that may happen throughout the lease term. This amount should be untouched and very liquid for easy accessibility if any considerable expense arises. 

Why Do I Need A Maintenance Reserve For My Investment Property? 

Expect the unexpected as a rental property owner. Some items or issues will come up throughout the lease term that you didn't take into account. Being prepared for unexpected maintenance events will ensure you don't lose your mind or shirt throughout your real estate investing career. Be prepared and set up a maintenance reserve account for your rental property. 

How Much Do I Need To Set Aside For Maintenance With My Rental Property? 

There are several different strategies and recommendations on how much you should set aside for maintenance repairs or CapEx Reserve. However, the account will depend on many variables such as property age, condition, personal financial security & stability, and your risk tolerance. For example, some will say you need to set aside between 1 percent and 3 percent of the property value set aside each year for repairs. So if you own a $200,000 Single-Family Rental Property, you should set aside $2,000 for your maintenance reserve buffer. Whether that amount gets used or not, its good to have that money liquid and accessible if need be. 

We like to set the expectation with rental property owners to estimate 1.5x the rental amount to be used throughout the 12-month lease term on maintenance repairs. For example, if you have a rental property leasing for $1,500/mth, expect $2,250 to be used on the property upkeep. Now, again this depends on many variables. If you have a new construction single-family rental, you likely won't have that much repair expenses. But if you have a 15-year old A/C unit in your rental property and it goes out, you'll be well over that $2,250 reserve amount you set aside. But at least you'll be prepared, and it won't hurt your pocketbook too much if you do have that $2,250 in reserves. 

Why My Property Manager Requires A Maintenance Reserve For My Rental Property? 

Now you might be wondering why your property management provider requires to have a maintenance reserve amount held in trust for your rental property. If you have prepared yourself properly and set aside reserves in your personal account. Why does my manager also need a reserve account? The management company holds this maintenance reserve account to handle any routine or emergency maintenance items that will be an owner expense. It's there to make your rental property run more efficiently. If your management company didn't have this, they would be calling you every time there is an issue requesting your CC information or for payment to the technician for fixing the $120 leaking sink. 

The management maintenance reserve account will also reduce your involvement in the day-to-day operations of owning an investment property. You hired a property manager for a purpose. A professional property management company will save you time, money, keep you compliant with local, state, and federal laws while reducing your involvement. If they needed to request funds on every maintenance request, you'd essentially be managing the property yourself. 

What Is A Standard Maintenance Amount Held By A Property Manager? 

Every professional property management provider will have a maintenance reserve account for your rental property—an account with a set amount they can use without the owner for authorization. We've seen management agreements requiring anywhere between $250 - $500 held in reserve. That amount would be replenished back up to the required amount from the tenant's following rental payment if any repairs were made during that month. Any repair or improvement exceeding that reserve amount for each improvement and repair (except emergency repairs), you as the landlord will have to give authorization. The lower the maintenance reserve account is, the more your involvement will be. Trust your manager; it's their job to manage repairs and control expenses. 

Final Thought: Be Prepared For Rental Property Repairs. 

Thinking there will be no repair expenses is naive. No matter how new your rental property is, repair and preventative maintenance are part of owning a rental property. Your rental property is a business, and all businesses have operational costs. Be prepared for repairs, and you will be set for a profitable rental property investment. If you have any questions or would like to connect, please don't hesitate to reach out to us here at The Listing Real Estate Management. Orlando's most trusted property management company, dedicated to being a resource for all rental property owners and investors. Learn more about our property management services in Orlando, Florida. We are your best choice for Orlando property management. Cheers!


Author

Jobe Peterson



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