In order for the owner to prepare for significant capital expenditures, it is common to establish an escrow or reserve account. An escrow or reserve account enables the owner to prepare financially for large expenditures by regularly putting aside smaller amounts in a separate bank account (i.e. monthly or yearly). By preparing ahead of time for these large expenditures, it helps prevent the disruption of cash flow needed for operating expenses and debt service. Escrow accounts can also be used to hold all tenant security deposits. With residential tenants, it is required that security deposits be held in a separate escrow account from the property’s general operating account.
