Is it Wise to Invest Reserve Accounts?

    Yes, it is.

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    As a community association, investing in reserve accounts is a crucial decision that can have a significant impact on your long-term financial stability. Reserve accounts are the funds set aside by community associations for the purpose of covering major repairs and replacement of common areas and amenities, such as roofs, elevators, swimming pools, and parking lots.

    Reserve Studies usually assume some interest is earned on reserve account balances.  The assumptions in Reserve Studies are typically very conservative, with interest earned (or investment yield – net of taxes) ranging from 1 percent to 3 percent. Interest earnings on reserve balances can be an integral factor in the long-term funding plans for reserves. In order to protect these funds, community associations might choose conservative, low-risk investments, such as certificates of deposit (CDs). CDs are a smart choice for reserve accounts because they offer several benefits that align with the goals and needs of community associations.

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    Guaranteed Returns

    First and foremost, CDs offer guaranteed returns. Unlike stocks, bonds, or mutual funds, which can be subject to market fluctuations and volatility, CDs are a fixed-income investment that offers a predetermined rate of return over a specific period of time. This predictability and stability make CDs a safe and reliable option for reserve accounts.

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    Low Risk

    Another advantage of CDs is their low risk. CDs are FDIC-insured up to $250,000 per depositor, per insured bank. This means that in the unlikely event of a bank failure, the FDIC will reimburse depositors for the amount of their deposits, up to the insured limit. This level of protection provides peace of mind for community associations and their members.

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    Flexibility in Investment Duration

    In addition, CDs offer flexibility in terms of investment duration. Community associations can choose from a range of CD terms, from as short as three months to as long as several years. This allows associations to tailor their investment strategy to their specific needs and goals.

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    Competitive Interest Rates

    CDs also offer competitive interest rates. Although they may not offer the highest returns compared to other investment options, CDs typically offer better rates than savings accounts or money market accounts. This makes them an attractive choice for reserve accounts, where preservation of capital and steady income are key considerations.

    Overall, CDs are a smart choice for HOA reserve accounts because they offer guaranteed returns, low risk, flexibility, and competitive interest rates. By investing in CDs, community associations can ensure that their reserve funds are protected and working for the benefit of their members.

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    Create an Investment Policy

    Community Associations, particularly those with the potential for significant reserve, capital improvement, or operating savings account balances, should consider developing and approving an investment policy.  The policy should define the Association’s financial goals, objectives, and risk tolerance.  Most Associations adopt a very conservative investment strategic plan which protects Association assets from exposure to loss of principal.  The policy also ensures that the cash liquidity needs of the association are met by limiting the duration of specific investments.  The policy also establishes guidelines for cash management procedures designating responsibilities to the Board, Finance Committee, or Management Company.  The policy should list permitted investments such as money market accounts, certificates of deposit, or U.S. Government obligations.  Suppose risk-carrying investments are included in the policy. In that case, a threshold or limit on the percentage of risk-carrying investments can be built into the policy to limit overall exposure to investment losses. The policy may also list approved financial institutions and required coverages such as FDIC, SIPC, or Surety Bond-covered financial products.  Before crafting an investment policy, review the association documents to determine if specific requirements must be included in the policy.  Establish a process to review the policy periodically.  Safety, Liquidity, and Yield are the focus of a well-designed investment policy. 

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    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.