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A replacement reserve refers to an amount of money set aside by a real estate business for the expenses associated with replacing building components due to wear and tear.
In accounting terms, it is an amount that is taken from the company’s net operating income to fund the maintenance of assets with a short lifespan.
Like depreciation, it can also be just an accounting entry without any real movement of funds taking place.
Some businesses contribute a monthly amount to the find, while others might just make it an annual contribution.
Replacement reserves can be especially important in communal living where homeowners need to maintain the shared premises.
Without a reserve fund, it would be a tedious task to get any money to have things done.