Planning and Investing Your HOA Reserve Fund –
Most of us would never dream of trusting our health to a doctor who hadn’t finished medical school, or our finances to a banker without any formal training. In much the same way, most residents would never want to place the future of their community in the hands of an HOA board uninterested in strategic planning, and in thinking seriously about the future. It is vitally important, in other words, for your HOA board to be serious about planning and investing your HOA reserve fund; the question is how.
The natural temptation, of course, is to let your banker handle it for you; that’s not an awful idea, but you might be surprised by how beneficial it can be to explore some other options. For larger communities with significant reserve funds, it might even be worthwhile to hire a full-time financial planner to manage the funds.
In the case of a smaller HOA, board members can use their own world experience and general knowledge of finance to come up with good investment plans. Here are a few quick pointers for helping you lay these plans:
- Typically, an HOA will want to insist upon 100% risk-free coverage. That probably means obtaining full FDIC coverage. There might arise an isolated case, here or there, where an HOA wants to pursue a more aggressive (and therefore risky) investment strategy, but that is very much the exception to the rule.
- Remember the basic financial reality that there is some tradeoff in liquidity, safety, and yield. If your HOA opts for a more liquid investment plan, for instance, you are probably going to get a lower return; a higher yield, meanwhile, is going to mean a higher risk; and so forth.
- The important thing is balance. Be aware of the fact that you will need to tap into that reserve fund for repairs or emergency maintenance at some point down the road. Long-term investment plans may seem like a good idea because of the high yield they offer, but that means nothing if you are severely penalized from withdrawing funds early.
- In short, it takes some thoughtful strategy and foresight to come up with an investment plan that offers maximum gain, but also leaves you flexible to use that reserve money as needed.