Sinking Fund: noun – fund accumulated and set aside by a corporation or government agency for the purpose of periodically redeeming bonds, debentures, and preferred stocks. The fund is accumulated from earnings, and payments into the fund may be based on either a fixed percentage of the outstanding debt or a fixed percentage of profits. Sinking funds are administered separately from…
Source: Encyclopedia BritannicaI use the term Sinking Fund a little bit differently. But the end results are the same.
If I am your agent during a transaction I will look for things that are going to cost you money down the road. Example: Sure, it’s a great duplex with healthy cash flow, a new furnace and air, good structural soundness and a good many updates.
But did you notice that roof?
Your insurance agent, your inspector and I all agree that the roof has a shelf life of somewhere between 5-8 years left before it will need replacing. What do we think that is going to cost? Let’s say for our example to replace that roof today would run right about $5,500. That’s a complete tear-off and replacement. So let’s just say that will easily be $6,000 grand in 6 years.
So here’s what you do. $6,000 divided by 72 months is $83.33 per month. Now figure out how much of that monthly fee you want your property to pay for. All of it? Okay, take the cash flow you figured you were getting and subtract the $83.33 per month from it. Does the property still look good to you?
The point of this exercise is to get you to understand that unless you wish to be a slum lord and bleed the property dry (making sure you won’t get top dollar when it is time to sell) you are going to have maintenance along the way that you need to account for.
And for me, well, I would rather have my rental homes pay for themselves. Rather than me writing a $6,000 check from my personal funds. Know what I mean?
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