Replacement reserves are those funds that a property owner sets aside with the specific intention of using the money to pay for the renovation (renewal) and replacement of capital assets.
Homeowner associations that maintain adequate replacement reserves throughout the life of the community will realize higher resale values when the homes in the community are sold to second and third generation buyers.
By accumulating reserves during the service life of the assets property owners can avoid expensive recapitalization loans which makes the property more attractive as a buy and hold investment.
The correlation between funding of the reserve account and the rate at which the assets are depreciating is well understood by investment property owners who depreciate capital assets as part of a tax planning strategy. Whereas, for property owners who are not profit-motivated there are other reasons for establishing a replacement reserve fund.