Sinking Fund Accounts: What Landlords and HOAs Need in 2025

Managing rental properties or community associations requires foresight and diligent financial planning. Sinking fund bank accounts offer a powerful strategy to prepare for large, predictable expenses, ensuring your property remains well-maintained and financially stable.

For landlords and Homeowners Associations (HOAs), understanding and implementing these funds is crucial for long-term success, especially as 2025 brings new considerations.

This guide explores what sinking funds are, their unique applications for landlords and HOAs, and best practices for navigating the financial landscape ahead.

Key takeaways

• A sinking fund is a savings account for a specific future expense or goal.
• Landlords use sinking funds for planned costs like major repairs, vacancies, and capital improvements.
• HOA reserve funds are a specific type of sinking fund for community common areas and assets.
• Legal requirements for HOA reserve funds vary by state and local regulations.
• Strategic management of these funds can enhance property value and reduce financial stress.

What is a sinking fund?

A sinking fund account is a savings account set aside for a specific future expense. It represents a disciplined approach to saving for known future costs. Unlike general savings, a sinking fund has a clear, pre-defined purpose, guiding regular contributions towards that objective. 

The sinking fund account's meaning lies in how intentional and structured the savings are—each dollar has a job. This proactive financial strategy helps individuals, businesses, and property owners avoid debt when large expenses are anticipated.

For example, a family might establish a sinking fund for a down payment on a car or a child's college tuition. In real estate, this concept translates to setting aside money for property-related expenses. The goal is to accumulate the necessary funds over time, preventing financial strain when the expense becomes due.

Sinking funds vs. other savings

Sinking funds are often confused with emergency funds or general savings, but they serve different purposes. 

Sinking fund vs. emergency fund

The primary difference lies in predictability. A sinking fund is for known, anticipated expenses, such as a roof replacement or an appliance upgrade. You know these costs will eventually occur, even if the exact timing is uncertain. 

Conversely, an emergency fund is for unknown, unexpected crises like sudden job loss or an unforeseen medical emergency. It acts as a safety net for genuine surprises, whereas a sinking fund addresses planned financial needs.

Sinking fund vs. general savings account

A general savings account holds money without a specific, immediate purpose. It might be for broad financial security or vague future goals. A sinking fund, however, has a highly specific objective. The difference in sinking fund vs. savings lies in intent; savings accounts are flexible, but sinking funds are specific.

For instance, a general savings account might simply hold extra cash, while a sinking fund targets the replacement of a specific HVAC unit in five years. This dedicated focus ensures that funds are available when needed for their intended purpose.

Common landlord sinking fund categories

Landlords face various predictable expenses that benefit from dedicated savings. These categories help ensure funds are readily available for necessary property upkeep and operational needs. Proper planning allows for smooth transitions and minimizes financial surprises, supporting your broader financial management for rental strategy.

These categories aren’t exhaustive—there are plenty of other sinking fund ideas depending on the age, size, and condition of your rental.

Major repairs and replacements

Properties inevitably require major repairs and replacements over time. These can include significant structural repairs, HVAC system overhauls, or appliance upgrades. 

Planning for these items helps manage costs associated with general property maintenance and wear and tear. A sinking fund for wear and tear ensures you are prepared for the degradation of property components.

Vacancy and tenant turnover costs

Even with careful tenant screening, vacancies and tenant turnovers are an unavoidable part of property management. Sinking funds can cover potential periods of no rental income. They also account for expenses like cleaning, minor repairs, marketing, and screening new tenants. 

This financial cushion helps landlords handle unpaid rent collection and the costs associated with preparing a unit for re-rental.

Capital improvements

Capital improvements are upgrades that enhance a property's value or extend its useful life, such as a kitchen renovation or adding a new bathroom. These are distinct from routine repairs and often involve substantial investment. 

A dedicated sinking fund for these projects allows landlords to make strategic upgrades that can increase rental income or property appreciation. This type of fund is similar to a capital reserve for planned large expenditures.

Operating reserve

An operating reserve acts as a working capital fund for day-to-day fluctuations in income and expenses. It covers minor unexpected costs or temporary cash flow shortages that don't qualify as major emergencies. 

This helps maintain consistent operations without disrupting your long-term financial plans. Think of it as a buffer for operational fluidity, also known as an operating reserve account.

Emergency fund for rental property

While a sinking fund covers known future expenses, an emergency fund for rental property covers unforeseen emergencies specific to your rental. 

This might include sudden structural damage from a storm or an unexpected, costly repair that was not anticipated in your sinking fund plan. It provides a crucial safety net against truly unpredictable events.

Best practices for landlords to manage sinking funds

Effective management of landlord sinking funds ensures financial preparedness and minimizes stress. Implementing best practices helps maintain clear financial boundaries and accurate planning. These strategies contribute to overall property health and investment growth.

Calculate contributions

Start by identifying the expected lifespan of major components like roofs, HVAC systems, and appliances. Estimate the replacement cost for each item and divide it by its lifespan to determine the annual or monthly contribution needed.

For example, if a roof costs $15,000 and lasts 15 years, you would need to save $1,000 annually for that specific fund. This systematic approach ensures adequate savings over time.

This amount becomes your regular sinking fund payment to stay ahead of large expenses.

Keep funds separate

Maintain separate bank accounts for each sinking fund or use distinct sub-accounts within a single banking platform. This prevents commingling funds and ensures money is available for its intended purpose. 

Many landlords find value in utilizing fee-free bank accounts to avoid unnecessary charges on these dedicated savings. Baselane makes setting up a property sinking fund easy by allowing unlimited sub-accounts.

Review funds periodically

Review your sinking fund calculations and balances annually. Property costs can change, and components might last longer or shorter than anticipated. Adjust your contribution amounts as needed to reflect current market prices and actual wear and tear. 

This vigilance ensures your funds remain adequately funded for future needs.

HOA reserve funds: The sinking fund for community associations

For HOAs, a sinking fund reserve account is a specialized savings fund for shared community components. They ensure the community can afford significant, non-annual expenses like roof replacements, road resurfacing, or pool repairs without resorting to special assessments. 

While essentially a sinking fund, "reserve accounts are never called 'sinking funds' in HOA lingo.” These funds are often maintained in an HOA reserve account to ensure proper segregation.

This brings up an important distinction: sinking fund vs. reserve fund. A sinking fund targets one known expense, while a reserve fund covers many, based on a long-term plan.

And in the sinking fund vs. designated fund comparison, designated funds are any accounts set aside for a specific purpose. A sinking fund is just one type, typically used for large, planned projects like a roof or HVAC replacement.

Standard components funded by HOA reserves

HOA reserves fund major capital projects for shared community assets. This includes structural components like building exteriors, roofs, and foundations. Other common elements are recreational facilities such as swimming pools, tennis courts, and clubhouses. 

Infrastructure like private roads, sidewalks, and drainage systems also fall under reserve funding. A sinking fund freehold property usually involves shared funding responsibility based on ownership percentage.

These costs can also be covered through a sinking fund service charge that’s built into homeowners’ regular dues.

Types of reserve funding strategies

HOAs typically employ different strategies to fund their reserves. Full funding aims to accumulate 100% of the estimated replacement costs for all reserve components. Baseline funding seeks to maintain a minimum reserve balance, often aligned with legal requirements or industry recommendations. 

Other strategies might involve cash flow management or threshold funding. In a sinking fund leasehold property, reserve planning is usually handled by the landlord or managing agent, with contributions scheduled from leaseholders through service charges.

Rule of thumb: 70–100% funding levels

A common industry guideline suggests that an HOA's reserves should be at least 70% fully funded at any given time. A 70% funded reserve indicates that the fund holds 70% of the total estimated cost required for future major repairs and replacements. 

Achieving 100% funding is ideal, ensuring complete financial readiness for all projected capital expenses.

Legal and regulatory landscape for sinking funds in 2025

The legal and regulatory environment plays a significant role in how sinking funds, particularly HOA reserve funds, are managed. While specific requirements vary, property owners and associations must remain compliant with evolving mandates. New regulations and economic shifts will impact financial planning in 2025.

There is no single, universally mandated federal law requiring HOAs or private landlords to establish sinking funds. Some associations are required to balance designated fund accounts to align with projected maintenance and replacement needs. 

However, requirements for HOAs can be set at the state or municipal level, or by association covenants. 

This ties into broader discussions like amortization vs. sinking fund, where amortization spreads out loan repayment, while sinking funds stockpile cash for large, one-time costs.

For example, in New Jersey, the 2024–25 Structural Integrity and Reserve Law requires associations to conduct reserve studies and update their funding plans periodically. Other states have their own rules, while some leave it to association bylaws.

Impact of the Corporate Transparency Act (CTA) on HOAs in 2025

In 2025, HOAs will fall under the expanded scope of the Corporate Transparency Act (CTA). This federal law requires boards to disclose beneficial ownership details to the federal government. 

This new reporting requirement will potentially impact HOA financial management and reporting practices, adding another layer of compliance for associations.

Implications of interest rate environments on fund growth and borrowing

The prevailing interest rate environment significantly affects sinking and reserve funds. With lower federal interest rates, HOAs can consider refinancing existing debt, revisiting their investment strategies, and potentially borrowing funds for major capital projects at a reduced cost. 

Conversely, rising interest rates could make borrowing more expensive but offer higher returns on invested reserve funds. Monitoring these trends is crucial for maximizing fund growth.

Setting up and managing your sinking fund accounts

Establishing and managing sinking or reserve fund accounts requires strategic choices regarding banking and financial tools. Automation and clear tracking are vital for successful long-term financial planning. Utilizing modern solutions can significantly streamline these processes.

Choose  the right type of account

The first step is selecting appropriate banking accounts that offer flexibility and growth. Many HOAs find the best bank account for the HOA to allow multiple sub-accounts for different reserve categories. 

For landlords, utilizing a banking solution that allows for creating separate accounts for each property or sinking fund category is highly beneficial. High-yield savings accounts are ideal for these funds, as they allow your reserves to grow over time.

Automate contributions

Automate regular transfers from your operating account to your sinking or reserve funds. This ensures consistent funding and removes the temptation to spend the money elsewhere. Automated contributions make saving for large future expenses effortless and consistent.

Don’t confuse an automatic investment plan with a sinking fund, as the former aims to grow wealth, while the latter covers planned expenses.

Track and report

Accurate tracking and reporting are essential for monitoring fund health and making informed decisions.

For landlords, using property management financial software or financial management for rentals can provide detailed insights into contributions and expenditures. Baselane's bookkeeping tools offer real-time cash flow insights and reporting, helping you get a clear view of your cash flow and expenses.

For HOAs, specialized HOA accounting software and a robust digital banking app are crucial for transparent financial management. Baselane's banking platform provides real-time transaction synchronization, allowing you to accurately categorize transactions and easily capture receipts for effortless tax readiness.

This level of detail makes sinking fund property management more efficient and less stressful.

Comparing account types for sinking/reserve funds

Landlords who want growth options may also treat their reserves as a sinking fund investment account, using interest-bearing accounts to keep funds liquid while earning returns.

The role of professional oversight

For HOAs, professional oversight, often from a property management company or a financial advisor, ensures compliance and optimal fund management. 

For landlords with large portfolios, a financial advisor can offer insights into investment strategies for these funds. Their expertise can help navigate complex financial regulations and investment opportunities.

Benefits of proactive sinking fund management

Implementing a robust sinking fund strategy offers numerous advantages for both landlords and HOAs. These benefits extend beyond simple financial preparedness, fostering stability, improving property value, and reducing long-term stress. Proactive financial planning is a cornerstone of successful property ownership and community management.

• Reduced financial stress & avoidance of debt: Eliminates the anxiety of unexpected large bills by having funds readily available, preventing the need for costly loans or emergency credit, and reduce rental property maintenance
• Enhanced property value & appeal: A well-maintained property, supported by adequate sinking funds, is more attractive to prospective tenants or buyers, leading to higher rents or sale prices.
• Improved budgeting & long-term financial stability: Encourages disciplined saving, leading to more accurate financial forecasting and a clearer picture of your property's financial health.
• Avoidance of special assessments (for HOAs): Properly funded reserves prevent unexpected, one-time charges levied on homeowners, fostering goodwill and financial security within the community.

Bottom line

Sinking fund accounts are an indispensable tool for landlords and HOAs looking to maintain financial stability and ensure the longevity of their properties. By proactively setting aside funds for anticipated major expenses, you can avoid financial emergencies, enhance property value, and simplify long-term budgeting.

Embrace a disciplined approach to saving and leverage modern financial platforms designed for property owners. 

Baselane offers banking and bookkeeping tools that can help you create separate accounts for each property and category. This integrated approach saves you time, provides financial clarity and control, and helps you grow your real estate business. Sign up now.