We fund our reserve account with between 2%-4% of the purchase price. If we are going to do anything up-front, we also fund that immediately (like repaving a section of road, doing a large improvement to a private utility, etc.)
Where the reserves come into play are for things that do not immediately impact our cash flow. For example, we have a park where we have owner financing in place for 10 years. Sometime in year 8, we’re probably going to resurface the road to help with the refinance. My preference would be to save for this out of cash flow for the next 8 years instead of inefficiency sacking all of that capital away at once or expecting all of us to cough up the money in year 8. Therefore, we increase our reserve account by about 2% of our gross revenue each month. Our savings will increase as we push revenue and hopefully keep up with the price to do the job 8 years from now. When that time comes, it shouldn’t interrupt our cash flow. The same should be done for septic. If you expect a large problem to occur every so many years, the money should be saved to deal with it. You can dip into your initial reserves for a lot of this, but you’ll still have to replenish those after dealing with the problem. We choose to save every month and hopefully never have to dip into the reserves we started with or interrupt our cash flow each month.