Most properties with an affiliated management company, such as commercial buildings and condominium associations, integrate a “sinking fund” into their budget. This sinking fund is setup to cover the costs of future capital expenses such as building painting and roof replacement.
For instance, condo owners are required to pay Homeowner’s Association (HOA) dues; and a large part of those dues are used to pay for repairs and maintenance items.
Essentially, sinking funds are setup as a way to budget for large expenses that will arise in the future. This decreases the likelihood of a financial hardship by dividing large expenses into smaller, more manageable amounts.
For example, an HOA puts new roofs on each of the 100 homes under its control. The roofs have a 30‐year lifespan and each costs $10,000 ($1,000,000 total for all 100 homes).
In order to avoid charging every homeowner a whopping $10,000 in 30 years when new roofs will be needed, the HOA sets aside a portion of each homeowner’s monthly dues into a sinking fund for roofing. This amount is just under $28 per month for each homeowner ($1,000,000 divided by 30 years
and 100 homeowners)...much better than $10,000 at once!
As a renter, your landlord takes care of these items. But as a homeowner, you must prepare for these future outlays so they don’t take you by surprise; especially if you don’t have a condo with built‐in HOA dues for these costs.
Consider implementing a sinking fund savings as though it’s a regular part of your monthly mortgage payment...you’ll be glad you did! Think air conditioner, roof, outside painting, etc.