It may seem like a smart move to invest HOA reserve funds, but there’s more to the decision than boards think. There are several considerations to make, including risk, liquidity, and yield. Plus, not all state laws and association bylaws allow reserve fund investments in the first place.
Can the Board Invest HOA Reserve Funds?
Whether or not an association can invest its reserves depends on two things: state laws and the governing documents. Some states strictly regulate what boards can use reserves for, including investments. Nevada and California are good examples, with both states imposing stringent requirements on where boards can invest reserves.
Currently, Virginia has no such law. For this reason, boards must look to their governing documents. The CC&Rs and bylaws, in particular, should contain guidelines for investing HOA reserve funds.
Beyond state laws and the governing documents, board members must also consider their fiduciary duty. Board members must act in the best interest of the association. This means performing proper research and following due process when making financial decisions.
The reserve fund functions as a savings account. It has the express purpose of covering the repair or replacement of major components when they inevitably fail. Investing reserves naturally comes with risks, and it may not be worth taking those risks in the long run.
What to Include in an HOA Reserve Fund Investment Policy
To ensure the protection of the reserves, associations should establish a policy for investing them. Here are the key factors to consider when creating this policy.
Safety
Board members must prioritize safety above all else. Investments are rarely risk-free. It may be tempting to pursue a high-risk, high-yield option, but this could cause the association to lose all of its reserves.
To ensure safety, the goal must be capital preservation. Association boards should invest only in accounts insured by the FDIC. The best examples of these include bank savings accounts, treasury bills, and certificates of deposits (CDs). Skip the stocks and mutual funds, as they tend to carry higher risk.
Liquidity
The whole point of the reserve fund is to cover the cost of major repairs or replacements. If the need suddenly arises, the association must be able to access the funds easily. For this reason, investment policies should also emphasize liquidity.
To ensure quick access, board members shouldn’t lock themselves into long-term accounts. These are investments that mature and can only be liquidated after a set period of time, usually years. Boards won’t be able to withdraw the principal amount, at least not without penalties or loss of investment. This may force the association to turn to special assessments or dues increases to meet repair needs.
Diversity
The golden rule of investment is to “never put all your eggs in one basket.” This means boards should spread risks across multiple areas to ensure security. Instead of investing in a single account, associations should diversify by allocating funds across several accounts. Of course, it goes without saying that all these investments should still be secure and low-risk.
Yield
Contrary to popular belief, yield should be the last consideration. While high-yield options may be tempting, they are often high-risk, too. Board members must prioritize safety and liquidity over yield.
Best Way to Invest HOA Reserve Funds
There are three investments that work well for HOA and condo reserves: FDIC-insured CDs, money market accounts, and U.S. Treasury securities. Let’s discuss them below.
FDIC-Insured CDs
Certificates of Deposit (CDs) are the most prevalent investments for associations. These CDs offer both safety and moderate yield. They come with guaranteed interest rates based on set timelines.
Associations can invest in CDs by purchasing them. Time increments can be anywhere from three months to five years. Returns tend to be fixed, too, so boards know what they are getting out of the investment. Since CDs come with different yields, it’s best to shop around first to get the best deal.
It is worth noting that CDs don’t rank high on the liquidity scale. If the board wishes to withdraw the investment before maturity, there’s a penalty involved. To avoid this, boards can opt for a ladder structure, allowing them to withdraw a portion of the principal over a timeline.
Money Market Accounts
Money market accounts work in much the same way as bank savings accounts, but they have higher interest rates. To invest in money market accounts, the board must pay a minimum amount. While safe, money market accounts have liquidity limitations, but they don’t completely hinder withdrawals. As with CDs, these accounts are also insured by the FDIC.
U.S. Treasury Securities
Known as one of the safest investments, U.S. Treasury securities are another popular choice. They come in several forms, including treasury bills (T-Bills), treasury notes, and treasury bonds.
T-Bills reach maturity in less than a year. They boast an average yield of 1.3 percent. Treasury notes, on the other hand, tend to mature between 2 and 10 years, with an average yield of 2.3 percent. Finally, treasury bonds reach maturity in 20 to 30 years, with an average yield of 2.8 percent.
Many communities prefer U.S. Treasury securities because they are not subject to state or local taxes. That said, while safe, treasury investments don’t offer much liquidity. Investments are locked in for a set period. If the HOA needs cash before maturity, a broker can auction them off to someone else.
Can HOA Funds be Invested?
There are two types of funds that associations maintain: the operating fund and the reserve fund. As previously explained, state laws and the association’s governing documents determine whether an HOA can invest its reserves. When investing, it is important to prioritize liquidity, safety, and diversity over yield.
On the other hand, the operating fund is not fit for investment. Boards need immediate access to the operating budget. An association uses this fund to cover day-to-day expenses, so it is unwise to use it to purchase treasuries, CDs, or money market accounts.
Can HOA Invest Money? Answered!
Association reserves play an essential role in long-term financial stability. Because most communities don’t need access to this money until much later, boards often want to invest HOA reserve funds. This can be a good move when done properly and within the board’s authority. That said, there’s no shame in letting the reserves sit in a bank account.
Keymont Community Management offers expert HOA financial management services to associations in Virginia, Maryland, and Washington, DC. Call us today at 703.752.8300 or request a proposal to start your journey!
RELATED ARTICLES:
- How Much HOA Fee Is Too Much? Factors Boards Should Review First
- Get Your HOA Finances In Order With Financial Management
- Understanding HOA Fees: What Are Homeowners Paying For?
