Setting up a funded reserve account is an important step in analyzing the property.  Funded reserves are funds set aside from operations to provide for replacements of key components of the building.  These include, the roof, HVAC systems and windows just to name a few.  Most savvy lenders will ask for 2 to 3% of cash flows to be set aside for this purpose.  These funds are expensed each year, and allow the lender to determine how the property performs including these "costs".

 

Realty Analytics V 4,01 includes a Reserves calculator that is quite helpful in determining the appropriate amount of reserves.