Beyond the Bank Account: A Guide to Investing Reserve Funds for HOAs
Your community association has a healthy reserve fund and a funding plan in place—congratulations, you are ahead of the curve. The next critical question for the board is: what should we be doing with this money? Letting a substantial sum of cash sit in a standard, low-yield checking account is a missed opportunity and can even lose purchasing power to inflation over time.
As a board, your fiduciary duty extends to the prudent management of these funds. Investing your reserves isn't about risky speculation; it's about safe, strategic growth to help offset inflation and future contribution increases. Here’s a guide to the principles of investing HOA reserve funds.
The Golden Rule: Safety, Liquidity, and Yield (in that Order)
Unlike a personal investment portfolio, the goal for investing reserve funds is not aggressive growth. The priorities, as recognized by industry best practices and state laws (including in California), are always:
Safety: The principal must be protected above all else. This means investing in federally insured or guaranteed accounts and avoiding market risks like individual stocks.
Liquidity: A portion of the funds must be accessible for both planned projects and unexpected emergencies without incurring major penalties.
Yield: Once safety and liquidity are assured, the goal is to earn the highest possible return.
Common Investment Vehicles for Reserve Funds
Based on the principles above, boards typically use a combination of the following conservative investment vehicles.
High-Yield Savings Accounts: Simple, fully liquid, and FDIC-insured up to $250,000 per institution. This is often the best place for funds needed in the short term (within 1-2 years).
Money Market Accounts: Similar to savings accounts, these are FDIC-insured, fully liquid, and often offer slightly higher interest rates.
Certificates of Deposit (CDs): CDs offer a fixed interest rate for a specific term (e.g., 6 months, 1 year, 5 years). They are also FDIC-insured. The trade-off for a higher yield is a penalty for early withdrawal, making them less liquid.
U.S. Treasury Securities (T-Bills, T-Notes): Backed by the full faith and credit of the U.S. government, these are considered one of the safest investments in the world. They can be a great option for funds that won't be needed for several years.
Strategy in Action: CD Ladders
A "CD ladder" is a popular and effective strategy for balancing liquidity and yield. Instead of putting all your long-term funds into a single 5-year CD, you "ladder" them.
Example: With $100,000, you could invest:
$20,000 in a 1-year CD
$20,000 in a 2-year CD
$20,000 in a 3-year CD
$20,000 in a 4-year CD
$20,000 in a 5-year CD
Each year, as a CD matures, the board can either use the funds for a planned project or reinvest it into a new 5-year CD at the current (likely higher) interest rate. This strategy ensures that a portion of the reserve funds becomes liquid every year while still capturing the higher yields of long-term investments.
Final Recommendation
Prudently investing your reserve funds is a key component of your fiduciary duty. Always consult with your reserve study and a qualified financial advisor to create an investment policy that aligns with your community's specific timeline for capital projects.
Need help aligning your financial plan with an investment strategy? Contact Apex Reserve Group for a complimentary 30-minute consultation.