What are replacement reserves in real estate?

Replacement Reserves Definition

In real estate, replacement reserves are funds set aside to cover future capital expenditures for repairing, replacing, or updating major components of a property. These reserves are typically accumulated over time and are used to ensure the property remains in good condition and retains its value. Common uses for replacement reserves include roofing, HVAC systems, parking lot resurfacing, and updating common areas. This proactive financial planning helps property owners manage large expenses without needing to secure additional financing or impose special assessments on tenants or members of a homeowners association.