Should we invest our reserve funds?Many signs are pointing to a US economy on the upswing – consumer confidence is up, unemployment rates are down, and the stock market is approaching record territory.  Companies are investing in growth, so shouldn’t your HOA or community association invest as well? There’s a big reserve account just sitting there gathering dust waiting for the next capital expense. As a board member, is this a good time to take advantage of the market improvement and invest some or all of that reserve account money in stocks, bonds, or real estate? The short answer is NO!

Don’t take risks with your community’s funds

There are a variety of reasons why community association boards shouldn’t make risky investments, but to me the main one is that this isn’t your money. It belongs to the other homeowners, and as a board member it’s your fiduciary responsibility to manage that money wisely. Safety should be your main objective, then liquidity. Interest and returns should be at the bottom of the priority list. That said, there are still ways to generate a return with no risk.

You can still earn some interest without the risk

Certificates of deposit (CDs) and money market accounts, since they are insured by the FDIC, offer a way to generate at least some interest without risk. CDs normally pay a fixed interest rate over a set period of time (like 2 years), and money market accounts normally offer a lower, variable rate with no set term. I did a quick Google search and saw current interest rates as high as about 2% for longer term commitments. That’s better than I’ve seen over the past couple of years.

Before investing any reserve account money into a term investment like a CD, your board will want to answer a few questions:

  • How accurate is our reserve study? If the reserve study is more than 3-5 years old or missing key components, consider conducing a new study before you lock up any reserve account funds.
  • When will you need the money? As I mentioned above, liquidity is important so you have the right amount of money available when you need it for planned (or unplanned) reserve expenses. Term investments like CDs take more advanced planning.
  • Where will you invest the money? The FDIC insurance limit on all accounts (operating, reserve, etc.) is typically $250,000 per client, per financial institution, so you may need to utilize more than one bank if you’ll be making a larger investment.

Timing and liquidity – making sure you have the reserve funds when you need it

If CDs are the right option, consider a “ladder” approach, meaning that you purchase CDs with staggered terms, so you have regular opportunities to utilize the funds or reinvest. For example, you could purchase four CDs, one of which expires every 6 months for 2 years. That means you’ll always have access to 25% of your reserve funds within six months to use for capital expenses or reinvestment.

Consult with an experienced advisor or CPA

You’ll want to consult a qualified and experienced advisor to review your reserve study and reserve account, and make recommendations for the best type, amount, and term of investments. Property management companies are a good source of information, as are CPAs with HOA experience. If there’s any risk to the investment principal, avoid that investment and keep it safe!

Neal Bach, CPA