Glossary term
Replacement Reserves
Replacement reserves are money set aside each year for big, periodic repairs such as roofs, appliances and paving, so these costs do not hit all at once.
Replacement reserves are an annual allowance, often stated per unit, for items that wear out over several years rather than monthly. Examples include roofs, HVAC equipment, flooring, appliances and parking lot work.
Setting money aside smooths the cost of these projects. Lenders often require a reserve, and buyers may subtract it from NOI to get a cleaner view of long-term earnings.
A property with no reserve may look better on paper than it really is. Ask what the reserve is and whether it fits the age and condition of the buildings.
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