Property investors need to know about sinking funds

Published On

Nov 10, 2023

When purchasing an apartment within a strata scheme, a sinking fund is among the foremost considerations for property investors. It may not be the initial thought for a prospective apartment buyer, but it ranks high in the list of crucial factors to contemplate.

From expenses like building envelope, roof maintenance to lift repairs, the costs associated with building upkeep can accumulate significantly over time.

The concept of a sinking fund, now referred to as a capital works fund in NSW, serves as an emergency fund designated to cover future repair and maintenance expenses for a building. Administered by the owners' corporation, this fund ensures comprehensive maintenance, especially in common areas and not to be confused with the administrative fund.

The purpose behind sinking funds is to equip the owners' corporation with ample emergency funds to address any upcoming essential works. Each property owner contributes to the sinking fund through regular payments, aiming to prevent the need for additional contributions when faced with substantial building expenses. Essentially, it serves as a financial safety net for all property owners within the strata scheme.

Sinking funds aren't just a characteristic of well-managed buildings; in fact, they are a legal requirement in certain parts of Australia, including New South Wales, Victoria, Queensland, the Australian Capital Territory, and the Northern Territory. In these regions, owners' corporations are legally obliged to have a 10-year sinking fund plan or forecast in place.

Examples of expenses covered by a sinking fund encompass walls, paintwork (for external walls or internal common areas), roofing, lifts, common air-conditioning, and the replacement of fixtures like lights and ceiling fans, along with repairs for common property. This contrasts with an administrative fund, which, though established by the owners' corporation, caters to shorter-term or day-to-day operating expenses and regular maintenance such as gardens, pest control, and cleaning.  

For prospective buyers of strata apartments, it's imperative to inquire about the sinking fund:

  • Sinking Fund Amount: How much is currently in the sinking fund, and is the sum considered sufficient?
  • Evaluation Frequency: How often does the owners' corporation review the sinking fund plan?
  • Levy/Contribution Adequacy: Is the levy/contribution amount raised by the owners' corporation adequate to ensure the available funds align with the forecast?

In essence, strategic, long-term planning and maintenance of the building contribute to minimising the necessity for major, expensive fixes in the future. The level of care a building receives plays a pivotal role in the capital growth of a property.

My colleagues and I were instrumental in pioneering the introduction of sinking fund reports as a valuable tool for effective strata building management. Our efforts have assisted numerous strata managers in accurately overseeing their funds. Drawing on our distinctive insights into the maintenance needs of strata communities, we initiated our sinking fund forecasting service in the early 2000s, establishing ourselves as one of the earliest companies in most states to provide this innovative service.

Quantum QS is widely recognised as the foremost provider of Maintenance Reserve Funds (referred to as a Capital Works Fund in NSW) and Capital Replacement Fund reports in the retirement village industry.

To request a quotation, please visit our website at www.quantumqs.com.au or send an email to info@quantumqs.com.au.

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Property investors need to know about sinking funds

When purchasing an apartment within a strata scheme, a sinking fund is among the foremost considerations for property investors.