How much money should a body corporate have in the maintenance reserve - or fund?
How much money should you have in reserve? That depends of course. It’s a bit like “how long is a piece of string?” But it’s still a good question and there are a few benchmarks we can use to get an idea.
You should have enough to cash on hand at the beginning of each year to cover the maintenance you plan to carry out during that year.
As a benchmark, seasoned property investors - those who buy residential properties as an investment - budget for a minimum of $1000 per year average to cover maintenance as a cost of owning the asset. Extrapolate that to a unit owner and it wouldn’t be unreasonable for a 30 unit apartment building to be collecting $30,000 a year in contributions to the maintenance reserve. We're not saying you should, just that it wouldn’t be unreasonable.
Then if each owner is contributing $1,000 each on average each year for the next ten years, providing this covers planned maintenance, your levies shouldn’t have to increase much in the future, if at all, and your owners can budget with confidence.
Let’s say we have a 30 unit building with $120,000 in reserve. This will equate to each owner’s contribution to this reserve averaging $4,000. That’s actually quite a good investment, not just because you will be able to maintain the building but also because of the effect this will have on prospective buyers.
Let’s consider a scenario where we have two identical 30 unit apartment buildings and the only difference is that one has $120,000 in the bank and a LTMP demonstrating that is enough to cover planned maintenance, while the other has nothing in the bank and no LTMP.
Which building would you perfer to buy a unit in? And would you be prepared to pay at least $4,000 more? Most people would. Because it tells us that the body corporate is well run and on top of maintenance. So that $4,000 of the owner’s money sitting in the body corporate’s bank account is a really good investment.
So there it is. You need enough to provide for the planned maintenance in each year and to keep levies consistent. On that basis a reasonable reserve will build up and that’s just fine.
And of course, best practice.
Prepared by: John Bradley. August 2016