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3 Reasons Commercial Property Investments Need a Reserve Fund

5 March, 2019
Categories: Commercial, Investments

There are many reasons any sensible commercial property investment syndicate has a reserve fund. Here are three of them.

It might not happen in the first month, or even first year, but eventually a time comes when you’re commercial property investment needs a top up. That’s why we believe it’s wise to shield returns from threat by maintaining a reserve fund.

A reserve fund is savings typically set aside at the start of an investment which covers unscheduled expenses. It can also be accumulated by gradually withholding a small percentage of rent for a ‘rainy day’ allowance. The measures provide an enormous level of comfort to investors who can safely expect a consistent annual return, knowing unexpected outlays are adequately catered for.

Perhaps you need to finance a new air conditioning unit or maybe it’s to fill the monetary rabbit hole of a vacating tenant. We take a strong stance to investor returns and have listened to our investors’ demand for consistency and regularity. We have also learnt from our earlier syndications which had limited reserves. From these experiences we’ve developed an ethos of providing investors with regular cheques in the bank, rather than continually asking them to put their hand in their pockets to chip in for these sorts of expenses.

Three reasons a reserve fund is critical for commercial property investments

1. A reserve fund mitigates risk

A reserve fund for each investment property allows a solid buffer to mitigate risk of those unexpected expenses which occasionally crop up, like a tenant vacancy, an economic downturn or any kind of structure or capital requirement.

It might not be a fail-safe mechanism for a successful investment, but a reserve fund is a crucial buffer any responsible commercial property investment syndicate would have.

2. It allows property managers to react quickly

Things go wrong from time to time. Tenants go bust and air conditioning units die. Often these ailments need to be remedied immediately to make sure your investment’s heartbeat can keep ticking.

Having a reserve fund allows your commercial property management team to quickly react to a problem.  They can implement a solution with the funds they already have available. They key benefit here is management’s ability to keep tenants happy and trading and operating well, even when the going gets tough. The quicker landlords can react to external shocks, the better chance each tenant has of thriving. Reserve funds directly correlate to swift reaction speeds.

A reserve fund might do more than just fix problems. It might be used to improve your investment. If you see an opportunity to add value to the property, whether it be improving signage or helping with fit-out costs, you can quickly take advantage of an opportunity before others and to the betterment of your tenant. This type of proactiveness is what ultimately helps maintain full portfolio occupancy (i.e. tenants want landlords who ‘come to the party’ and give them the best chance of thriving).

3. Most importantly, it’s about peace of mind

You’ve committed to your investment and you don’t want to be worrying about it all the time. You want comfort that your money is safe and your investment is growing – especially if it is to fund your retirement.

Having a reserve fund gives investors peace of mind. You know the commercial property management team won’t be knocking on your door to ask for more money and that this month’s dividend isn’t suddenly going to be a half or a quarter of the usual amount.

This lets you focus on your golf handicap or the grandkids or your round-the-world cruise, knowing that thestrategic decision to set up a reserve fund (and a very competent property management team) is there to deal with anything that comes up.

And lastly, we recommend investing with a commercial property syndicate that has a healthy reserve fund structure in place. At Properties & Pathways we have an extra layer of protection for our investors because we recognise its our job to ensure the property is relevant today but that it also stands the test of time for tomorrow. That’s why we take a stake in every property. It’s in our best interest to get the strongest result from every property, every time.

To find out more about investing with Properties & Pathways, get in touch.

 

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