How to do a reserve study yourself
A reserve study answers one question: will the association have the money when the roof, the paving and everything else wears out? Here is the method, start to finish.
1. Check whether your board is allowed to
Some states let the board prepare the study. Others require a credentialed preparer or a site inspection every few years. Look up your state in the requirements by state, then read your governing documents, which can be stricter.
2. List the components
A component is anything the association must repair or replace, that wears out on a predictable schedule, and that costs too much to absorb in a normal year's budget. Roofs, paving, exterior paint, fences, pool surfaces and mechanical equipment are typical. Leave out things individual owners are responsible for. See the component checklist for a starting list.
3. Put three numbers on each one
- Cost to replace it today. Contractor quotes are best. Past invoices are the next best thing.
- Useful life. How many years it lasts when new.
- Remaining life. How many years it has left.
4. Set your assumptions
You need the reserve balance at the start of the year, what you contribute each year now, how much you expect contributions to rise, an inflation rate for replacement costs, and the interest your reserve account earns.
5. Project 30 years
For each year: start with last year's ending balance, add the contribution and the interest, and subtract whatever falls due that year at its inflated cost. When a component is replaced, schedule it again one full useful life later.
Example. A 48-unit association has $185,000 in reserves and contributes $42,000 a year, rising 3% a year. Its 12 components would cost $746,140 to replace today. In 2036 the roofs and gutters fall due together, at about $449,000 after inflation. The projection shows the reserve running out that year and bottoming out at -$236,213 in 2039.
6. Find the contribution that works
Raise the first-year contribution until no year ends below the minimum balance you want to keep. In the example, that takes $57,900 a year, or about $101 per unit per month, up from $73. There are other ways to set the target; see reserve funding methods.
7. Report it and repeat it
Give owners a one-page summary: the reserve balance, percent funded, the current and recommended contribution, and the years with large expenses. Then update the numbers every year. Costs move, components fail early, and a study that is five years old is describing a different association.
The usual way a board gets this wrong
The common mistake is setting costs low or lives long so that dues don't have to rise. The spreadsheet will show whatever you tell it. Use real quotes, and let the result be what it is.
Skip building the spreadsheet
Reserve Study Kit is an Excel workbook that does this math for you: a 30-year plan, percent funded for every year, and the contribution that keeps you above your minimum. $79, one time.
See how it works