What property investors need to know about sinking funds

It’s not the first thing a prospective apartment buyer might think about, but a sinking fund is one of the top things to consider when buying a property in a strata scheme.

What is a sinking fund?

From roof maintenance to lift repairs, building expenses can be very costly and add up over time.

A sinking fund, or capital works fund as they are now known in NSW, is an emergency fund to cover a building’s future repair and maintenance expenses.

It’s set up by the owners’ corporation and ensures the building is well-maintained, especially in common areas.

The idea behind sinking funds is for the owners’ corporation to have enough emergency money to pay for any future works that need to be completed.

Each owner pays for the sinking fund through regular contributions. It also aims to ensure owners won’t need to stump up extra cash when a hefty building expense comes their way – it’s a financial safety net for all the property owners in the strata scheme.

Sinking funds are not just a feature of well-managed buildings, it’s actually a legal requirement for some parts of Australia, including NSW, Queensland, the Australian Capital Territory and the Northern Territory.

In these jurisdictions, it is a legal requirement for owners’ corporations to have a 10-year sinking fund plan or forecast in place.

Examples of expenses that could be paid for by a sinking fund include:

• Roofing
• Lifts
• Common air-conditioning
• Paint work (for external walls or internal common areas)
• Replacing fixtures such as lights and ceiling fans
• Repairs for common property

This differs from an administrative fund, which is also established by the owners’ corporation but cover shorter-term or everyday expenses and regular maintenance such as gardens, pest control and cleaning.

If you’re seeking to buy a strata apartment, here are three things about sinking funds you should be asking:

• How much is in the sinking fund? Is the amount of money in the sinking fund decent?
• How often does the owners’ corporation evaluate the sinking fund plan?
• Is the levy/contribution amount being raised by the owners’ corporation sufficient to ensure that available funds can meet the forecast?

In general, long-term planning for and maintenance of the building will help reduce the need for major expensive fixes later down the track. How well looked after a building is plays a key role in a property’s capital growth.

What is a special levy?

From time to time, unexpected problems can crop up within a building that need to be fixed urgently. But the sinking fund plan may not have accounted for these surprise costs.

If there isn’t enough money in the sinking fund to cover unforeseen issues, a special levy can be proposed at the owners’ corporation general meeting.

But special levies don’t get charged whenever there’s an emergency issue in the building. The owners’ corporation can’t collect special levies from property owners without majority support from everyone in the strata scheme.