HOA Reserve Funds: Why They Matter and Smart Investment Strategies
An integral part of managing a homeowners' association (HOA) is understanding the significance of HOA reserve funds. These funds, unlike the day-to-day operating funds, are set aside for crucial repairs and replacements of common areas and facilities within the community. This comprehensive guide will delve into the importance of HOA reserve funds, smart investment strategies, and how to ensure your HOA is financially prepared for the future.
HOA Reserve Funds: Why It Matters and How To Invest Smartly
When it comes to managing a homeowners association (HOA), understanding and effectively managing HOA reserve funds is crucial. These funds are set aside for significant repairs and replacement of common areas and amenities, distinguishing them from operating funds which cover daily expenses
Why Are HOA Reserve Funds Essential?
Reserve funds are key to long-term financial stability, allowing for the maintenance of common areas like roofs, elevators, swimming pools, and parking lots without imposing sudden financial burdens on the community. These funds also have a vital role in keeping the community attractive and functional, preserving or even enhancing property values over time.
How Much Reserve Should an HOA Have?
The challenge for many HOAs is in ascertaining the appropriate amount to set aside in their reserve funds. This amount typically depends on a comprehensive Reserve Study, which outlines anticipated major repair and replacement costs over a specific timeframe. The Reserve Study usually assumes a conservative interest yield of 1-3% on reserve account balances.
While every HOA community has its unique needs and thus different reserve fund requirements, a regular reserve study every 3 to 5 years is advisable. This helps the board to understand how much money should be allocated to the reserve fund and anticipate any potential spikes in repair and replacement costs.
The Risks of an Underfunded HOA Reserve Funds
Having an underfunded reserve fund poses significant risks to an HOA. When unexpected costs arise, the HOA may be forced to abruptly increase association dues or seek less efficient funding solutions, which could result in financial stress for community members and potential discord within the community.
Investing HOA Reserve Funds: Key Considerations
Choosing the right investment for your reserve fund requires consideration of several factors, including the reliability of returns, level of risk, flexibility in terms of investment duration, and the competitiveness of interest rates.
CDs can be an attractive option due to their guaranteed returns and low risk, being FDIC-insured up to $250,000 per depositor per insured bank. Their flexibility in investment duration and generally higher interest rates than savings or money market accounts are additional advantages..
A Well-Designed HOA Investment Policy
Especially for HOAs with substantial reserve, capital improvement, or operating savings account balances, it is beneficial to develop and approve an investment policy. This policy should articulate financial goals, objectives, risk tolerance, and cash management procedures, with guidelines for permissible investments and approved financial institutions.
The primary focus of an effective investment policy should be Safety, Liquidity, and Yield (SLY). Prior to formulating an investment policy, review your association's documents for any specific requirements.
Need Assistance with HOA Reserve Funds? We're Here to Help
If you're interested in learning more about how to manage your community association's finances and make smart investment decisions, contact us. Our experienced team can help you navigate the complex world of HOA finances and ensure the long-term financial health of your community.