Hoa Reserve Funds: Cd Investment Strategies For Your Community

Investing HOA reserve funds is a complex decision that can impact the financial future of an entire community. HOA boards must balance the desire for financial growth with the need to maintain liquidity and safeguard community funds. While investing reserve funds can lead to passive financial growth, it is important to carefully consider the associated risks and legal implications. Some states impose restrictions on HOA investments, limiting options to government-insured investments such as CDs and treasuries. Additionally, maintaining sufficient liquidity is crucial to cover short-term obligations and unexpected expenses. As such, it is generally recommended to prioritize safety and liquidity over yield when investing HOA reserve funds.

Liquidity vs growth

Liquidity vs. Growth is a key consideration when investing HOA reserve funds. Liquidity refers to the ability to quickly convert investments into cash, while growth refers to the potential for the investments to increase in value over time.

Maintaining liquidity is crucial for HOA reserve funds to ensure that the funds can be readily accessed when needed for emergency repairs, capital improvements, or other unexpected expenses. Without sufficient liquidity, the HOA may be forced to impose special assessments or take out loans to cover these costs.

On the other hand, investing for growth can help the HOA passively grow their money and multiply their assets. This can be particularly beneficial for HOAs with limited resources, as it allows them to stretch their reserve funds further. However, investing for growth typically involves sacrificing some liquidity, as investments may be locked in for a certain period, and early withdrawal may incur penalties.

When deciding between liquidity and growth, it is essential to consider the specific needs and constraints of the HOA. Factors such as state laws, governing documents, market conditions, and the level of risk tolerance should be carefully evaluated. It is also important to ensure that the HOA has sufficient liquid funds in its reserves at all times to prepare for unexpected expenses.

To balance liquidity and growth, HOAs can consider investing in a mix of short-term and long-term investments. Short-term investments, such as money market accounts or bank savings accounts, offer higher liquidity but lower returns. On the other hand, long-term investments, such as certificates of deposit (CDs) or U.S. Treasuries, offer higher potential returns but lower liquidity. By diversifying their investments across different types and maturities, HOAs can aim to maintain a balance between liquidity and growth.

State laws and bylaws

Compliance with State Laws:

Different states have varying requirements for HOA reserve funds. Some states mandate that HOAs maintain a reserve fund, while others don't. For example, California Civil Code Section 5515 requires HOA boards to exercise "prudent fiscal management" when it comes to reserves, including investment decisions. Oregon has a similar law, restricting investments to government-insured options like treasuries and certificates of deposit. It's essential to review your state's specific laws to ensure compliance.

Understanding Bylaws and Governing Documents:

Your HOA's bylaws and governing documents may provide guidelines or restrictions on investing reserve funds. Some bylaws allow for investing as long as the principal remains untouched. However, these documents often contain vague language, so it's recommended to consult an HOA manager, accountant, or attorney to ensure proper interpretation and compliance.

Conducting a Reserve Study:

Weighing Investment Options:

Prioritizing Safety and Liquidity:

When investing HOA reserve funds, safety and liquidity should be top priorities. State laws and bylaws may require your HOA to choose federally insured investments or those that protect the principal. Additionally, maintaining liquidity ensures that funds are readily available for emergency repairs or capital improvements without imposing special assessments on homeowners.

In summary, when considering investing HOA reserve funds, it's crucial to thoroughly understand and comply with state laws and bylaws. These regulations vary from state to state and can significantly impact the investment options and strategies available to your HOA. Always seek professional advice and carefully weigh the risks and benefits before making any investment decisions.

Fiduciary responsibility

When it comes to investing HOA reserve funds, the HOA board has a fiduciary responsibility to its members. This means that the board must act in the best interests of the community and carefully consider the financial risks and potential returns of any investment decision.

The primary purpose of a board member is to protect the assets of the association and make decisions that are in the best interest of the community. When it comes to investing reserve funds, this fiduciary duty includes being attentive to market conditions and making wise decisions that take into account both risks and potential returns.

In terms of specific investments, many associations choose to invest in certificates of deposit (CDs) and other interest-bearing accounts. These types of investments offer a balance between risk and reward, as they protect the principal amount while still earning some interest. However, it's important to note that these types of investments may not grow as much as higher-risk investments.

To ensure the safety of HOA funds, it is generally recommended to only invest in FDIC-insured accounts or investments. This includes bank savings accounts, treasury bills, and CDs, which are considered the safest options. On the other hand, stocks, mutual funds, municipal bonds, and non-government bonds typically pose the highest risks.

It's also important for HOA boards to maintain liquidity, as reserve funds are intended to cover the cost of major replacements, repairs, and maintenance. This means that the funds should be readily convertible into cash when needed. As such, long-term investments that lock up funds for extended periods may not be suitable for HOA reserve funds.

In summary, when investing HOA reserve funds, the board must prioritise the safety and liquidity of the funds while also considering potential returns. By investing wisely and maintaining a balance between risk and return, HOA boards can fulfil their fiduciary responsibility to their members.

Investment Policy

The HOA board has a duty to safeguard the community's funds. Therefore, the reserve funds should be available when the community needs them. However, investing in CDs can be a good way to generate a return while keeping risks low.

Safety First

When investing HOA reserve funds, safety must come first. The HOA's reserves are crucial to the continued operation of the association. Therefore, capital preservation and avoiding losses are paramount. To safeguard the HOA's money, consider limiting investments to FDIC-insured accounts or investments. Bank savings accounts, treasury bills, and certificates of deposit (CDs) are generally the safest options. In contrast, stocks, mutual funds, municipal bonds, and non-government bonds typically pose the highest risks.

Maintain Liquidity

Reserve funds should be readily available to cover the cost of major replacements, repairs, and maintenance. When creating your investment policy, emphasize the importance of liquidity to ensure that funds can be converted to cash quickly when needed. Avoid locking up all your reserves in long-term investments, as this may force the HOA board to impose special assessments.

Consider Yield Last

While yield is important, safety and liquidity are more critical for HOA reserve funds. Choose investments that offer a reasonable return while prioritizing safety and liquidity. Bank savings accounts are very low-risk but typically offer modest yields. Certificates of deposit (CDs) are a popular choice among HOAs as they offer a fair balance between safety and rewards.

Diversification

To maximize FDIC insurance coverage, consider diversifying your investments across different financial institutions. This way, you can ensure that your HOA's funds are protected even if one financial institution fails.

Regular Review

It is important to regularly review the performance of your investments and make adjustments as needed. Economic shifts or changes within your community may require you to adapt your investment strategy. Additionally, if you have an HOA Investment Policy, review it annually to ensure it remains effective and aligns with your community's financial goals.

Investment vehicles

There are several investment vehicles available for HOA reserve funds, each with its own advantages and disadvantages. Here are some options to consider:

• U.S. Treasuries: These include Treasury Bills (T-Bills), Notes, and Bonds, which offer different maturity periods and yield amounts. T-Bills mature in less than a year and have an average yield of 1.3%, while Notes mature between 2 to 10 years with an average yield of 2.3%. Bonds have the longest maturity of 20 to 30 years and offer an average yield of 2.8%. While U.S. Treasuries are not taxed at the state or local level, they usually offer low liquidity as they are locked in until maturity.
• Money Market Deposit Accounts: These accounts offer a more generous yield than traditional bank savings accounts but require a minimum investment amount and have limits on accessibility. They are insured by the FDIC for up to $250,000.
• Certificates of Deposit (CDs): CDs are considered safe investments that offer fair rewards. They are purchased in time increments ranging from 3 months to 5 years, with a fixed yield amount. It's important to shop around for the best rates, and consider a CD ladder structure to improve liquidity.
• FDIC-Insured Money Market Accounts: These accounts are insured by the FDIC and offer a safe option for investing HOA reserve funds. They may provide better yields than traditional bank savings accounts.
• Laddering CDs: This strategy involves keeping a portion of the association's funds in FDIC-insured money markets and staggering the maturities of CDs to have investments maturing at different times. This approach provides both liquidity and the potential for higher yields.
• Brokered CDs: These CDs offer liquidity but are subject to interest rate risk. There is no penalty for selling before maturity, but the value is subject to market movements.

When considering these investment vehicles, it's important to prioritize safety, liquidity, and return on investment. Consult with financial experts and consider the specific needs and risk tolerance of your HOA community to make informed decisions.

Frequently asked questions