Can an HOA invest reserve funds? This is a question many board members and homeowners ask. The answer isn’t so straightforward, as there are many factors at play. Plus, the HOA board must exercise caution and care when selecting which investments are worth getting into.
Can the HOA Invest Reserve Funds?
To a community association, the reserve fund acts as a savings account, covering major repair and replacement costs when assets fail in the future. It takes a while to build up this fund, and associations don’t always need the money immediately. Because of this, many boards consider investing the sum to maximize earnings.
Can the HOA invest money?
The answer to this depends on two things: state laws and the governing documents. In addition, board members must consider their fiduciary duty to the association before committing to an investment.
State Laws
Some states have laws that restrict what an HOA board can and can’t do with its reserves, including investing them. While most laws aren’t specific, they do require board members to practice fiscal discipline and perform due diligence before any decision.
Governing Documents
Board members must also refer to their governing documents, particularly the CC&Rs and bylaws. These documents should outline the association’s investment policy, including whether or not reserves may be invested.
Fiduciary Duty
Finally, board members must take their fiduciary responsibilities into account. It is important to prioritize the association’s best interests, and investing the reserves may not necessarily achieve that.
If the investment is too risky or based on unsound research, the board would be breaching its fiduciary duty. A breach like this could result in legal action against the board, or even finding directors personally liable for the negligent or malicious action.
Moreover, boards should consider the timeline for the requirement of reserves. If the association only has a few years before the first major repair expense, it may not be smart to invest the money, especially if the funds would be locked until maturity.
Should Homeowners Vote on Investing HOA Reserve Funds?
In general, an HOA or condo board may plan or oversee the association’s finances without a vote from homeowners. This includes HOA reserve fund management and investment.
That said, it is still important to check state laws and the governing documents. If regulations stipulate that owners get a vote, then the board must secure approval before investing the HOA reserves.
While this offers more control and direct participation from homeowners, it can also slow decision-making and action. If the board has to get approval for every move, delays are bound to happen.
Goals for HOA Reserve Funds Investing
Assuming state laws and the governing documents permit investment of the reserves, the board must consider certain goals. In order of priority, an association should aim for safety, liquidity, diversity, and yield.
Safety
Safety comes before anything else. Most investments carry inherent risk, and if the board invests unwisely, it might lose all of its reserve capital. The reserves are the association’s money, sourced from homeowner dues, so the board has a fiduciary duty to protect them.
There are investments that offer a higher yield but involve greater risk. Board members may want to pursue these, as they offer the most returns, but doing so would jeopardize the reserve fund. It is best to opt for the safest investments to ensure the association won’t lose all of its savings.
Focus on FDIC-insured investments. Examples include bank savings accounts, certificates of deposit, and treasury bills. If an investment doesn’t have FDIC insurance, it’s a good idea to decline it.
Liquidity
Next to safety, liquidity is a top priority. Board members need quick access to liquid cash when needed. If a roof collapses due to a storm, for instance, having the reserves tied up in a long-term investment could impede repairs.
To avoid this scenario, association boards should avoid investments with long lock-in periods. A lock-in period traps the association’s money in that account for a set number of years, allowing access only after the investment matures. If a lock-in period comes with an investment, the board should have the option to withdraw the capital without incurring penalties.
Diversity
Associations need a diverse investment portfolio. It is never a good idea to bet on a single account and invest all of the reserves into it. If the account fails, the association would lose the entirety of its reserves in one go. Instead, board members should spread out risk by investing in several secure, low-risk accounts.
Yield
Yield should never dictate the board’s investment decisions. In fact, it should be the last item on the priority list, if at all. There are plenty of high-yield options in the market today, but they all come with greater risk. Safety, liquidity, and diversity should come before yield.
Where to Invest HOA Reserve Funds
Most association boards aren’t well-versed in financial investments. To help out, here are the best options for an HOA to invest reserve funds.
Certificates of Deposit
Most HOA and condo associations opt for FDIC-insured Certificates of Deposit (CDs). These investments are quite safe and, thanks to guaranteed interest rates, offer satisfactory returns.
Board members can invest in CDs by buying them. These tend to be locked in for a set period, ranging from three months to five years. Since rates are also typically fixed, boards know what to expect in terms of ROI.
That said, CDs don’t boast easy liquidization. Associations have to pay a penalty if they wish to withdraw the money before maturity. Fortunately, boards can avoid this by investing in a ladder structure. This gives them the option to make partial withdrawals following a timeline.
U.S. Treasury Securities
U.S. Treasury Securities are one of the safest investments an association can make. Boards have several options, including Treasury Bills (T-Bills), Treasury Bonds, and Treasury Notes. Let’s discuss them below.
- Treasury Bills. T-Bills mature in less than a year with an average yield of 1.3 percent.
- Treasury Notes. Notes mature from 2 to 10 years, averaging a yield of 2.3 percent.
- Treasury Bonds. Bonds take the longest to mature, ranging from 20 to 30 years, with an average yield of 2.8 percent.
The good thing about U.S. Treasury Securities is that they don’t get taxed at the state or local level. Of course, they also come with downsides. Depending on the type of investment, it is not easy to liquidate the capital. They usually come with lock-in periods, but an association can auction these investments to secure liquid cash if needed.
Money Market Accounts
Money market accounts are similar to bank savings accounts, but they offer higher interest rates. To invest in these accounts, associations pay a minimum amount and wait for returns to come in. While these accounts offer safety and FDIC insurance, they aren’t quick to liquidate, like most investments. That said, withdrawals are still possible.
Can an HOA Invest Reserve Funds? Answered!
Associations should check their state laws and governing documents to see if investments are permitted. Yet, just because boards can invest reserves doesn’t mean they should. It is important to consider the association’s needs and goals, as well as the safety and liquidity of available investments, before making a decision.
Clark Simson Miller offers HOA financial management services to community associations. Call us today at 865.315.7505 or reach out to us online to request a proposal!
RELATED ARTICLES:
- What Is The HOA Reserve Funds FDIC Limit?
- HOA Reserve Fund Laws For Every State
- Institutional Investors In HOAs: Good Or Bad?