Homeowners Association reserve fund

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miamivice
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Homeowners Association reserve fund

Post by miamivice »

Our homeowners association's reserve fund, with a balance of right around $200,000, receives 0.01% interest annually. Essentially, we don't receive any return on investment for the reserve fund.

Is there anything we can do with it wisely that would generate more interest for us? Key thing is that it has to be a safe investment and it should require none to extremely minimum amount of board time to enact. i.e., we don't want anything complicated at all.
psteinx
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Re: Homeowners Association reserve fund

Post by psteinx »

$200K.

If you can get to 1% interest/return, that's $2000/year. Not NUTHIN', but not a ton, either. What would be the additional paperwork/tax burden from having not insubstantial interest? What if you invested in something and it went down 2%?

Probably the simplest way to get a SMALL increment of extra return is short-intermediate term treasuries (via some kind of cheap fund). They won't pay much, but likely more than 0.01%. But they could go down, and likely would complicate structural issues, at least a little. You'd likely need your standard bank (checking and or savings) account, PLUS a brokerage account, plus the ability to transfer between them, plus probably board approvals for all of this.

Or maybe bank CDs, if they are breakable for minimal penalty?
Last edited by psteinx on Tue Oct 26, 2021 2:13 pm, edited 1 time in total.
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prudent
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Re: Homeowners Association reserve fund

Post by prudent »

Consider a CD ladder from 1-5 years, and if you have to redeem one or more of the CDs early because the money is needed, that's the cost of getting more yield. No risk, and time needed to maintain it is just renewing one of the CDs once a year.
Paladin23
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Re: Homeowners Association reserve fund

Post by Paladin23 »

Also remember to check the association legal documents. Some of the typical documents, as well as some state laws, require that association funds only be invested in certain things, such as insured bank deposit accounts and government guaranteed bonds.
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8foot7
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Re: Homeowners Association reserve fund

Post by 8foot7 »

I would recommend leaving the funds in the bank and not locking them up in a CD or in an at-risk investment at all.
mary1492
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Re: Homeowners Association reserve fund

Post by mary1492 »

xyzzy
Last edited by mary1492 on Tue Oct 04, 2022 4:47 pm, edited 1 time in total.
Topic Author
miamivice
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Re: Homeowners Association reserve fund

Post by miamivice »

mary1492 wrote: Tue Oct 26, 2021 2:45 pm
miamivice wrote: Tue Oct 26, 2021 2:08 pm Our homeowners association's reserve fund, with a balance of right around $200,000, receives 0.01% interest annually. Essentially, we don't receive any return on investment for the reserve fund.

Is there anything we can do with it wisely that would generate more interest for us? Key thing is that it has to be a safe investment and it should require none to extremely minimum amount of board time to enact. i.e., we don't want anything complicated at all.
Your reserve fund is funded with the appropriate amount to be able to pay for the identified reserve items when they need repair or replacing. It does not assume that you will make any particular return on those funds. What does your most recent reserve study say? So, being that you and other HOA members have been funding the reserves to the appropriate level, why do you feel a need to get higher returns?

You aren't going to get higher returns without higher risk. No free lunches. As last poster pointed out, you very likely may not be legally permitted to put the funds anywhere besides a very narrow set of insured/guaranteed alternatives.
Our reserve fund is like a savings account. We have one particular item that will cost $350,000 to replace 22 years from now, and we are setting aside money each year to pay for the eventual replacement. The more interest we get the less we have to set aside.

I fully get we can't take risk with the money, but it seems like we could do better than 0.01%. Maybe not in today's low interest environment.
lws
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Re: Homeowners Association reserve fund

Post by lws »

Please review the HOA rules.
DarkHelmetII
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Re: Homeowners Association reserve fund

Post by DarkHelmetII »

In theory: harry browne permanent portfolio

In practice: I doubt there will be support to do this (or whatever strategy you might recommend) based on others' concerns, hesitations, skepticism, let alone state laws likely prohibiting this. ultimately would be opening yourself up to liability for breach of fiduciary duty (if you are on the board). a thankless job, my guess is that a successful portfolio beating CD returns will at most garner a few positive reactions but if this thing drops materially in value finger pointing will ensue, HOA will panic and sell low ... so many wrinkles.
alex_686
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Re: Homeowners Association reserve fund

Post by alex_686 »

I have been in this position before as Treasurer.

Generally the key points are safety and liquidity. You never know when there will be a emergency capital project.

You are going to want community buy in for whatever you do. This suggests simple strategies.

Common answers are money market mutual funds, bank's money market funds, short term CDs that are constantly rolled over.

My association uses Vanguard Short Term Corporate Bund Fund. That is about as risky as I would go in terms of duration (time) and credit risk.

You can make the case for bonds or CDs with a longer duration with liability matching. i.e. if the next big project is in 5 years buy a 5 year CD or bond. The problem is that capital projects rarely follow the reserve schedule. You need a fair bit of flexibility.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sport
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Re: Homeowners Association reserve fund

Post by sport »

Our HO association had the same problem. They are required to keep their funds in FDIC banks. They put some of the money into CDs. The rates are not great, but they are better than .01%
Eazyndn
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Re: Homeowners Association reserve fund

Post by Eazyndn »

I’ve been a board member of our 50 home HOA for the last 20 years. We have about $400,000 in reserves. We keep money needed for the next few years in a Money market savings account, and do a 1 to 5 year ladder of Brokered CDs with about $350000. Our account is with Edward Jones, and we pay no fees.
bradinsky
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Re: Homeowners Association reserve fund

Post by bradinsky »

We have a significant amount at a small local bank in northern Ohio & it’s at .3%. Not great but definitely better than .01%.
adamthesmythe
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Re: Homeowners Association reserve fund

Post by adamthesmythe »

My association uses CDs marketed for HOAs. I think these are the brokered CDs mentioned above?

The essential thing is the preservation of capital. Even in the absence of specific requirements in the documents I would use CD-like instruments.

> You never know when there will be a emergency capital project.

Actually you do, or at least you should, to a good approximation. That's what a reserve study is for. The CD durations should be matched with expected major expenditures.
alex_686
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Re: Homeowners Association reserve fund

Post by alex_686 »

adamthesmythe wrote: Tue Oct 26, 2021 7:27 pm > You never know when there will be a emergency capital project.

Actually you do, or at least you should, to a good approximation. That's what a reserve study is for. The CD durations should be matched with expected major expenditures.
Emergencies do happen. I would use the term best estimate assuming average conditions.

I can cite lots of examples where capital projects have had to be moved up by a decade. Sometimes bad luck, sometimes bad install, some items are just really hard to estimate. Once a "emergency" building code revision passed by the city that moved up a elevator overhaul by 7 years.

I can also cite lots of examples where capital projects have outlasted their planned lifespan by decades.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
basspond
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Re: Homeowners Association reserve fund

Post by basspond »

Be thankful you have a reserve fund. What would the costs be if the HOA had to take out a loan to cover some huge expense?
mary1492
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Re: Homeowners Association reserve fund

Post by mary1492 »

xyzzy
Last edited by mary1492 on Tue Oct 04, 2022 4:47 pm, edited 1 time in total.
MikeG62
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Re: Homeowners Association reserve fund

Post by MikeG62 »

Can't the HOA use an online savings account (FDIC insured) with a rate of ~50bps?
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stan1
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Re: Homeowners Association reserve fund

Post by stan1 »

MikeG62 wrote: Wed Oct 27, 2021 8:19 am Can't the HOA use an online savings account (FDIC insured) with a rate of ~50bps?
HOAs use a business/organizational account not a personal account. Our bank has a specific sub-class of HOA accounts. Federal banking and financial rules apply, plus whatever each state or local jurisdiction has layered on specifically for HOAs finances. We have used CDs in the past for about 1/3 of our reserve fund (break glass portion).
Mr. Rumples
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Re: Homeowners Association reserve fund

Post by Mr. Rumples »

Not in an HOA now, but was on the board for years including as treasurer. A note on terms...we did not consider the reserve fund an investment. Safety and liquidity was essential. Thus only savings and CD's. Otherwise, members will start to chime in about "investments."

Unforeseen major expenses happen. After 9/11 in CO, all high-rises had to conform to new elevator regulations...we had to totally replace ours to conform to new standards. As I recall, that was a $60,000 cost for them.
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an_asker
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Re: Homeowners Association reserve fund

Post by an_asker »

alex_686 wrote: Tue Oct 26, 2021 3:04 pm I have been in this position before as Treasurer.

Generally the key points are safety and liquidity. You never know when there will be a emergency capital project.
[...]
The problem is that capital projects rarely follow the reserve schedule. You need a fair bit of flexibility.
As far as I am aware, reserves are earmarked for specific long term projects and cannot be used for anything else.

The emergency project will have to be paid for within the operating budget/account or with a special assessment.

Unless of course, you are referring to a project that is what the reserve is set up for, such as roofs or painting, etc.
psteinx
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Re: Homeowners Association reserve fund

Post by psteinx »

Do HOAs have to file tax returns and pay taxes, particularly if they get some non-trivial amount of interest on their reserve account?
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miamivice
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Re: Homeowners Association reserve fund

Post by miamivice »

Just to correct some misconceptions:

1) The reserve fund is not an emergency fund. It is there to replace items in our association that have known, predictable life and will wear out at some specific time in the future. An unexpected repair could not be pulled 100% from reserves without overdrawing from our reserve account.

2) Our association, per our by-laws, is permitted to borrow money to pay for things. I would vote against doing so, but we are permitted by the by-laws to do so.
michaeljc70
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Re: Homeowners Association reserve fund

Post by michaeljc70 »

psteinx wrote: Wed Oct 27, 2021 9:36 am Do HOAs have to file tax returns and pay taxes, particularly if they get some non-trivial amount of interest on their reserve account?
We didn't have to pay tax on the interest as we were a not for profit. We did file taxes.
alex_686
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Re: Homeowners Association reserve fund

Post by alex_686 »

an_asker wrote: Wed Oct 27, 2021 8:53 am As far as I am aware, reserves are earmarked for specific long term projects and cannot be used for anything else.

The emergency project will have to be paid for within the operating budget/account or with a special assessment.

Unless of course, you are referring to a project that is what the reserve is set up for, such as roofs or painting, etc.
The capital reserve fund is for capital projects. So yes, specific projects.

Yes, I was referring to capital projects.

A reserve study is a engineer's estimate of life span and replacement costs. I have never known a engineer's to meet reality. Reality can throw a wicked curve ball at you sometimes.

I have never known of a emergency paining project, but I have heard of emergency roof repair.

As such you need a fair amount of liquidity in your reserve fund.

As a specific example, our condo's reserve schedule had a elevator overhaul scheduled in 10 years. Due to a "emergency" building code update we had to get it done within 3 years. That wrecked havoc with our reserve schedule because it coincided with another major capital project, a roof replacement.

Another specific example. Our reserve scheduled says we need to replace our boilers in 10 years. We won't. The reserve life has been 10 years for the past 20 years. The boilers are 30 years past their expected life span. They can probably last another 30 years as long as we can get replacement parts. The boiler company closed shop 20 years ago, so that is a dicey. So we are going to replace the boiler in the year we can no longer source spare parts. Who knows what that will be?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Homeowners Association reserve fund

Post by alex_686 »

michaeljc70 wrote: Wed Oct 27, 2021 9:41 am
psteinx wrote: Wed Oct 27, 2021 9:36 am Do HOAs have to file tax returns and pay taxes, particularly if they get some non-trivial amount of interest on their reserve account?
We didn't have to pay tax on the interest as we were a not for profit. We did file taxes.
Ours too, but there is a break point when you have to start paying taxes.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Homeowners Association reserve fund

Post by willthrill81 »

DarkHelmetII wrote: Tue Oct 26, 2021 3:00 pm In theory: harry browne permanent portfolio

In practice: I doubt there will be support to do this (or whatever strategy you might recommend) based on others' concerns, hesitations, skepticism, let alone state laws likely prohibiting this. ultimately would be opening yourself up to liability for breach of fiduciary duty (if you are on the board). a thankless job, my guess is that a successful portfolio beating CD returns will at most garner a few positive reactions but if this thing drops materially in value finger pointing will ensue, HOA will panic and sell low ... so many wrinkles.
Agreed on both counts.
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basspond
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Re: Homeowners Association reserve fund

Post by basspond »

mary1492 wrote: Wed Oct 27, 2021 6:18 am
basspond wrote: Tue Oct 26, 2021 8:11 pm Be thankful you have a reserve fund. What would the costs be if the HOA had to take out a loan to cover some huge expense?
1. HOA is required to have a reserve fund

2. HOA would have a special assessment to all homeowners. HOA would not take out a loan. I have been in the situation where because of the nature of the reason for a special assessment and the amount involved, a local bank provided loans to the homeowners individually (if they wanted to accept), which then had payments bundled with property taxes for 10 years.
So some homeowners might have to take out a loan to pay this off? What is the difference? In the end still more expenses to the home owners.
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