How HOAs Safely Invest Reserve Funds for Growth

Date Published : Feb-15-2024

Written By : Abigail Guevara

The Homeowners Association (HOA) reserve fund is often seen as a safety cushion to be used for unforeseen expenses that arise for major repairs, capital improvements and maintenance in shared community areas, however, this fund has untapped investment potential.

With the average HOA fee per homeowner being $200-$300/month multiplied by 365,000  HOA communities in the U.S., we’re looking at billions of dollars in HOA reserve funds possibly available for investment.

While the potential for investment is there, the reality is HOAs must still invest cautiously to see funds grow.

Let’s explore practical insights to transition your HOA reserve fund from passive savings to active growth.

Table of contents


Why is it Important to Maximize your HOA Reserve Fund?

Maximizing your HOA reserve fund is important to build and contribute to the health and well-being of the community.  An HOA is a nonprofit organization and can generate income from investments, but the profits must be used for community improvements.

Digging a little deeper we see that with a healthy and growth-oriented HOA reserve fund HOAs can:

Prepare for Financial Emergencies

The maintenance needs of your community are often unpredictable. A major crack in a shared laneway can show up out of nowhere. So, maximizing your reserve fund ensures that you have a robust financial safety net in place to address unexpected emergencies, such as major repairs, natural disasters, or infrastructure failures.

Preserve Property Values

A well-maintained community is an attractive community. Regular upkeep and prompt responses to issues help preserve property values. By maximizing your reserve fund, you can ensure that your neighborhood remains aesthetically pleasing and structurally sound, contributing to the long-term value of homeowners’ investments.

Avoid Special Assessments

Inadequate reserve funds often lead to special assessments—unexpected fees levied on homeowners to cover immediate expenses. By maximizing your reserve fund, you reduce the need for these sudden financial burdens on residents, promoting transparency and financial stability within the community.

Increase Reserve Funds

A well-managed reserve fund opens the door to strategic investments. By exploring low-risk, high-return investment options, your HOA can potentially grow its financial assets, creating additional income that can be reinvested into community projects or used to offset future expenses.

Enhance Community Amenities

A healthy reserve fund provides the means to enhance community amenities and services. Whether it’s upgrading common areas, implementing energy-efficient solutions, or introducing new recreational facilities, a well-funded reserve allows for continuous improvement in the overall quality of life for residents.

So, if this sounds appealing, let’s look at how your HOA can begin the process of growing its reserve fund.

Start with a Solid Reserve Fund Foundation

In the world of HOAs the reserve fund is like a lifeline for the community’s financial health. To ensure this fund is not only maintained but maximized, there’s a crucial step every HOA must take and that is to conduct a reserve study. This is both a best practice and a legal requirement.

The Reserve Study

A reserve study determines how much money homeowners must contribute to the reserve fund by examining the components the association owns and predicts future repairs and refurbishments.

An HOA is legally bound to uphold reserve fund balances. This means a reserve study should:

  • Be conducted at least once every three years
  • Serve as a guiding document ensuring the reserve fund aligns with the community’s needs.
Key Components of a Reserve Study

• Asset Identification- Pinpointing assets and potential maintenance concerns within the community.
• Annual Contribution- Determining the annual amount that should flow into the reserve fund to meet future needs.
• Lifespan Estimation- Assessing the lifespan of all community systems and components.

The reserve study provides a roadmap, estimating what renovations, repairs, and replacements might be on the horizon in the coming years.

Helpful Tip!

The HOA should work with a Reserve Specialist who can assess component aging over 30 years. If the community is more than 30 years old, engage other experts like a structural engineer.

Now, let’s explore what engaging in strategic reserve fund investing looks like.

Smart Approaches to Reserve Fund Investing

To quote Shakespear, “All that glitters is not gold” and this is true when investing valuable HOA reserve funds. An investment may look good enough to jump into, but before you do, apply these wise considerations:

1. The law

There are legal parameters around how your HOA can invest reserve funds. You will want to research your state’s reserve fund laws to understand what you can and cannot do, and what your HOA must adhere to.

2. Credibility

The responsibility of managing hundreds of thousands of dollars of community reserve funds comes with great responsibility. The HOA board has a fiduciary obligation to make wise decisions about funds which means carefully assessing where monies are invested and the likelihood of financial outcomes because of those investments.

3. Rules for safety

Some members of the HOA board may have strong opinions, but boards should not be led by just the strongest personalities in the governing group. HOAs have important governing documents—regulations, policies, bylaws, CC&Rs that indicate the percentage as well as how reserve funds can be invested, if at all, and HOAs can not act outside of these parameters.

4. Investment Expertise

HOA board members bring their knowledge and experience to the table for the benefit of the community, but it’s highly recommended to seek investment expertise by way of a financial advisor and/or the property management company when looking to invest reserve funds.

5. Annual Incremental Increases

While raising assessments is not a popular move, slight incremental, annual fee increases from homeowners can be a good option to maintain required reserve fund levels while some monies are invested.

6. Transparent Communication

Keep homeowners informed about how reserve funds are being invested as well as expected best and worst case scenarios of reserve fund investments.

Helpful Tip!

The IRS does not tax reserve funds as long as they’re kept in a separate account. So, make sure to engage the help of property managers and financial consultants to continue to avoid taxes on earned income from investments.

Remember, it’s not about flashy gains; it’s about steady growth. So, what are some investment portfolio that HOAs typically invest in?

Where to Grow HOA Reserve Funds

You may be eager to invest HOA reserve funds but be aware there are a range of investments available and they all carry a range of risks. Risky investments, though high yielding, are not the way to go when using homeowners’ reserve funds. Instead, the following low-risk options are better suited:

Certificates of Deposit

Certificates of Deposit (CDs) earns interest on a deposit for a fixed term and has higher interest rates than regular savings accounts. It also carries minimal risk compared to stocks and bonds, but there is a penalty to pay if you withdraw funds early.

Money Market Deposit Account

This is a savings account, with a higher interest yield. There is a minimum investment the HOA must make, and there is limited access to withdraw funds if needed before the end of the term. You also cannot withdraw funds from the account without penalty; however, The Federal Deposit Insurance Corporation insures these accounts up to $250, 000.

U.S. Treasuries

Investing HOA reserve funds here means HOAs don’t have to pay local or state taxes on returns. However, they are locked in until maturity—no withdrawals unless they are sold off. You can invest in Treasury bills, Treasury notes and Treasury bonds. They have varying investment terms, but essentially the longer the money is left in the investment the higher the percentage of return.

Maximizing Your HOA Reserve Funds

HOAs can increase reserve funds by investing some of the monies, but the board must carefully assess important aspects of investing and the investment before moving forward.

Before making any kind of investment, make sure the HOA board:

• Understands the benefits of investing HOA reserve funds.
• Uses a Reserve Study to see if the reserve fund is healthy enough to invest a portion of it.
• Checks that its approach to investing is sound.
• Knows what investments are as safe as possible, but still yields a good return on investment.

Because the HOA reserve fund reflects the financial stability of the community invest wisely, grow together, and let your reserve fund be a quiet hero, ensuring a bright and secure tomorrow for your HOA community!

Let us bring the answers to you.

We’ll make sure the leading HOA/condo news, trends and tips get to you first.

Protected by reCAPTCHA.
Confidential and Secure.
Privacy Policy

Useful Resources

Related Content

New Hawaii bills aim to ease financial strain for condominium communities

What if your condominium’s insurance premium increased from $400,000 to $3.3 million in one year? That’s what happened to the Peninsula at Hawaii Kai. The Hawaii community, consisting of 630 single and multifamily apartment homes and condominiums, was shocked, to say the least.     Table of contents     Sadly, this type of increase is not […]

View More →

Getting rid of amenities: Is it worth the trouble?

2024 has not delivered much financial relief. Money continues to be tight and everyone is feeling the pinch. Naturally, organizations are looking for new and creative ways to save or generate money, and governed communities are no different. Condo and HOA members may be considering wealth-building initiatives including charging for visitor parking, upgrading to more […]

View More →

HOA grants

Did you know that your HOA might be eligible for a grant? Unlike loans, recipients do not have to pay back grant money.

View More →