Hoa Funds: Where To Invest For Maximum Returns

Investing HOA reserve funds is a complex decision that could set up an association for financial growth. However, it is not without its risks. HOA reserve funds are savings set aside by an HOA board for unexpected expenses not covered by insurance, such as repairs and replacements. The funds are managed by a board of directors for the HOA, who have a fiduciary duty to act in the best interest of the community. Therefore, it is crucial to carefully consider the various investment options available and make informed decisions. Factors such as state laws, the association's financial goals, and the level of risk tolerance should be taken into account when deciding where to invest HOA funds.

State and Governing Documents

State laws and governing documents play a crucial role in determining how HOA reserve funds can be invested. Some states impose restrictions on the types of investments permitted for HOA funds. For example, California's Civil Code Section 5515 mandates that HOA boards exercise "prudent fiscal management" regarding reserve funds, and Oregon restricts associations to government-insured investments. Thus, it is essential to review the specific laws and regulations in your state before making any investment decisions.

Additionally, the bylaws and governing documents of your HOA organisation may provide guidelines or restrictions on investing reserve funds. Some bylaws may allow for investing as long as the principal remains untouched, but it is crucial to carefully review and understand these documents. Consulting with an HOA manager, accountant, or attorney is advisable to ensure compliance with all relevant laws and regulations.

The fiduciary duty of board members towards the HOA community is another essential consideration. This duty entails making decisions in the best interest of the community and managing reserve funds prudently. While investing reserve funds can offer potential growth opportunities, it is also important to weigh the risks involved and ensure the safety and liquidity of the funds.

To summarise, when considering investing HOA reserve funds, it is imperative to thoroughly review and understand the applicable state laws, governing documents, and fiduciary duties. By doing so, you can make informed and compliant investment decisions that balance the potential for growth with the need to safeguard the community's funds.

Fiduciary Duty

As a board member, you have a fiduciary duty to protect the assets of your HOA and make decisions in the best interest of the community. This includes the management of HOA reserves and ensuring the safety of the association's assets.

When deciding whether to invest HOA reserve funds, it is crucial to consider the financial interests of the HOA and the level of risk involved. While investing reserves can offer the potential for passive financial growth, it is important to remember that the primary purpose of these funds is to provide a financial safety net for emergencies or unforeseen expenses. Therefore, liquidity is a key factor to consider. The HOA board must ensure that there are sufficient liquid funds readily available to cover unexpected costs, such as repairs or replacements due to extreme damages or natural disasters.

To fulfil your fiduciary duty, it is recommended to prioritise safety and liquidity over yield when investing HOA reserve funds. This means choosing investments that are lower risk and provide easier access to funds, such as FDIC-insured money market accounts, bank savings accounts, treasury bills, and certificates of deposit (CDs). These investment options may offer modest yields, but they help safeguard the principal amount and provide the necessary liquidity for unexpected expenses.

Additionally, it is important to be aware of any state laws and governing documents that may restrict the types of investments allowed for HOA reserve funds. For example, some states may limit investments to government-insured options, such as treasuries and CDs. Understanding the legal requirements and your fiduciary responsibilities will help ensure that you are making informed and prudent decisions regarding the investment of HOA reserve funds.

Investment Policy

The HOA board has a duty to safeguard the community's funds and make decisions in the best interest of the community. Therefore, the investment policy should prioritise safety, liquidity, and yield, in that order.

Safety

The HOA's reserves are integral to the continued operation of the association. Therefore, capital preservation and avoiding loss must be prioritised. Only consider FDIC-insured accounts or investments such as bank savings accounts, treasury bills, and certificates of deposit (CDs). Avoid high-risk investments such as stocks, mutual funds, municipal bonds, and non-government bonds.

Liquidity

Reserve funds should be readily available to cover the cost of major replacements, repairs, and maintenance. Emphasise the importance of liquidity in your investment policy to ensure that funds are not locked into long-term investments, which could force the HOA board to impose special assessments.

Yield

While yield is important, safety and liquidity are the top priorities. Choose investments that offer a reasonable return, such as CDs, which offer fair rewards with low risk.

State and Governing Laws

Before investing, ensure that you are compliant with state laws and your governing documents. Some states have restrictions on the types of investments HOAs are permitted to take advantage of, such as limiting associations to government-insured investments. Your governing documents may also include policies on investments regarding reserves.

Expert Advice

Not all board members will have a background in investing or finances. Consider hiring an investment advisor with experience working with HOAs to help develop your investment policy and make investment decisions.

Regular Review

Review your HOA investments regularly to ensure that they continue to meet the needs of the association and comply with any changes to state or governing laws.

Board Member Knowledge

Not all board members will have a background in finance or investing. 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.

Board members should have a basic understanding of HOA financials. Along with understanding their responsibility as a fiduciary, it’s important to be informed about HOA investments and financial obligations. Even if you are working with a financial services company, make sure your association is choosing safe and time-tested investments.

It is important for boards to have a full understanding and insight into their community's finances and reserve funds. HOA boards should look to their community management company and financial services provider to help make sound investing decisions. Some boards research investment information themselves via the internet or financial publications, but this can be time-consuming and may not be the best use of their time. It is also unlikely that individual board members will be able to leverage the same competitive rates as a financial services company.

If you do decide to invest your HOA reserve funds, it is important to have a clearly written and defined investment policy. This usually includes a plan that is fully risk-free, which means full FDIC coverage. In some cases, you might need a more aggressive strategy.

The board must find the best balance between yield, the safety of HOA members' money, and liquidity. A good rule of thumb is to ensure that the majority opinion of your members corresponds to the level of risk taken.

Safety, Liquidity, and Yield

When deciding where to invest HOA funds, there are three key considerations: safety, liquidity, and yield.

Safety

As a member of the HOA board, it is your responsibility to ensure the safety of the HOA's assets. This means choosing investments that are low-risk and protect the principal amount. Examples of safe investment options include:

• Federally-insured investments
• FDIC-insured money market accounts
• Certificates of Deposit (CDs)
• Treasury bills

It is important to avoid risky investments such as stocks, mutual funds, and non-government bonds, as these could lead to significant losses.

Liquidity

Liquidity is also a crucial factor, as the HOA needs to be able to access funds quickly in the event of an emergency or unexpected repair. The reserve fund should be easily convertible to cash to cover the cost of major replacements, repairs, and maintenance.

When investing, consider the following to maintain liquidity:

• Limit the percentage of the reserve fund that is invested
• Avoid long-term investments
• Keep funds in a separate account from operating funds
• Maintain a portion of the reserve fund in a regular savings account for immediate access

Yield

While yield is important, it is generally considered a lower priority than safety and liquidity. The goal of investing HOA funds is not to maximize returns but to generate some extra income while preserving capital.

When considering yield, look for investments that offer a reasonable return with minimal risk. Certificates of Deposit are a popular choice, as they offer fair rewards with low risk. Money market accounts can also provide a more generous yield than traditional savings accounts.

In summary, when investing HOA funds, prioritize safety and liquidity above all else. Choose low-risk, federally-insured investments and maintain a portion of the funds in a liquid account for easy access. While yield is important, it should not come at the expense of safety and liquidity.

Frequently asked questions