Should an association invest reserve funds? Investing HOA reserve funds is an interesting decision that could set up an association for financial growth. However, any HOA reserve fund investment policy carries its share of risks. So, do you just hold on to your HOA reserves for a rainy day? When it comes to growing your homeowners association reserve funds, there’s a balance that needs to be met.
In this article:
Invest Reserve Funds With the Right Approach
Any investment decisions should be made carefully and with proper authority. This is especially important when making decisions for a homeowners association. So, when it comes to investing, HOA boards face a hard decision. On one hand, an HOA can usually use the extra funds that investment growth brings in. Thus, HOA with limited resources can make their reserve fund stretch further with a bit of investment.
On the other hand, the HOA board has the duty to safeguard the community’s funds. Thus, the reserve funds should be available when the community needs it. But, when an HOA decides to invest, they’re sacrificing some liquidity to generate a return. So, it could happen that your HOA might run out of cash when disaster strikes.
Factors to Consider Before Investing HOA Reserve Funds
Your HOA has likely been careful about contributing to its reserves account. If you’re considering investing that money and hoping for more growth, there are several factors you should think about. You should also consider whether your reserves need to be built up more before investing.
1. Your Fiduciary Duty to Your Members
A board member’s purpose is to make decisions in the best interest of the community. That also includes the management of HOA reserves. Investing your HOA reserve funds can be the best move you can make given the current economy. Or, it could be a better decision to keep your reserve funds somewhere safe.
For this reason, a lot of associations will go with investments like certificates of deposit and another account that is interest-bearing. Although this protects the principal, these types of investments may not grow as much because they are lower risk. On the other hand, it’s a more secure decision that saves your principal and can still earn you some extra cash.
In any case, the community association board is responsible for handling HOA money. Thus, it is not always a good idea to take risks with community funds. If you have the capability to invest some of your HOA reserve funds, there needs to be a balance.
On one hand, the HOA should invest in a way that makes the effort worthwhile. On the other hand, safety is always a priority. This, your HOA should always have enough liquid funds in its reserves at any given time. So, if the unexpected happens, your HOA is not caught unprepared.
2. Your Investment Policy in the Bylaws
Check your governing documents, as they may include a policy on investments regarding your reserves. The language used in these policies is often vague if they show up at all. So, even if they are included, it’s a good idea to speak with an HOA manager, accountant, or an attorney to be sure the money is consistently handled. It’s also a good way to ensure that everyone is aware of any policies on investments.
For the record, many HOA policies on reserves will make it a simple matter for the board to invest as long as the principal isn’t touched.
3. Board Member Knowledge
Not everyone on the board will have a background in investing or finances. If this is the case for most of your HOA board, you can hire an investment advisor with experience working with HOAs. This is especially helpful if you have large reserves.
Preparing to Invest Reserve Funds
So, you’ve decided that investment is the right move for your HOA reserve funds. Before you start sinking funds into the investment markets, it’s best to prepare.
When you try to generate returns on your reserves, your HOA board should at least be able to determine the following.
1. The Status of Your HOA Reserves
Before you start investing your HOA reserves, it’s best to determine exactly how much you have. It’s also useful to know how much you expect to add to your reserves, too. That’s why you need an accurate reserve study done before you proceed. How recent was your last reserve study? You can expect a reserve study that was done within three to five years to be reasonably accurate. Beyond that, your board will need to consider doing a new one.
2. Your Expected Reserve Expenses
When can you expect to draw from your HOA reserves? Remember that your funds are not much help to you if they remain locked into an investment. Thus, liquidity is crucial. You need to have enough liquid cash available when you need it. So, have your board plan out any expected reserve expenses. Make sure to factor in unplanned expenses as well.
Then, use that information to make a decision on your investment options. Some money market investments let you earn lower returns, but also lets you withdraw funds as you need to. Term investments, on the other hand, could pay a higher fixed rate. However, your funds are also locked up for a set period of time.
3. Your Investment Institutions
When you start investing your HOA reserves, you may need to use more than one bank to do it. If you do, it’s a good idea to keep each account under the FDIC insurance limit. This is typically set at $250,000 per client.
Do Your Research Before You Invest Reserve Funds
The most important tip is to do your research before choosing a specific option, since the money belongs to a large group of people, including you. Before your board decides to invest reserve funds, make sure you have all areas covered. It’s a good idea to get outside help from a trusted advisor. They can review your reserve account, and give you a useful recommendation on the investments that will best fit your situation.
- How To Protect HOA Reserve Funds And Operating Funds
- Why Is An HOA Annual Audit Necessary?
- 9 Ways The HOA Make Extra Money