Investing of Reserve fund

Started by BradP • 11 replies • 2297 views

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BradP (Kansas)
Posts: 2,640

Posted:

I am looking to see if others on here have invested their reserve funds in various ways to make additional money. Has anyone had success with money markets, CD's, etc? Looking for a safe way to get a little return on our reserves.

WilliamT (Arizona)
Posts: 489

Posted:

I believe CD's are the safest. If you have an MC, they will belong to a bank that will probably have the best interest, and some of them have flexible quarterly withdrawal plans.

PatrickH (California)
Posts: 204

Posted:

Hi Brad,

My HOA uses both CDs and Money Market funds. We keep about 80-90% of the Reserves in CDs, usually six month to one year CDs. We have about 10 CDs of varying amounts that mature at different times of the year and an agreement with our banks that they will just reinvest the money in a new CD unless we notify them otherwise.

The rest we keep in a money market fund so we can have easy access to it if needed for an emergency.

As we get closer to a major project, we look at which CDs are maturing and cash them out to transfer the money into the money market fund.

We get a slightly higher interest rate in the money market fund by having one where we can only draw four checks on it in a 30 day period. When we do a major project, four checks in 30 days is usually not a problem. Many contracts call for four payments, so it works out well.

Do some checking around, there are some "electronic" banks that offer higher rates on CDs that most "brick and mortar" banks. We've never used one since we're pretty happy with our banks, Wells Fargo and Bank of America, but there's some good competition out there.

GlenL (Ohio)
Posts: 5,491

Posted:

Along with Patrick's Association we stagger the due dates and buy CD's looking to get maximum return while keeping the money safe, i.e. do not use it to day trade. Because FDIC only protects $100,000.00 of any tax id number on deposit at any bank; we limit it to $90,000.00 at each bank and start again at another bank or savings in loan. Roger posted an excellent policy for investing Association funds:

Roger B
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Rules and Regulations on Investment of Reserve Funds

A Reserve fund is maintained to provide adequate funds for future capital investments, such as fencing, landscaping, irrigation, monuments, signs, and contingencies. Reserve funds shall be invested in an account, or accounts, which shall be separate from the annual operating account, in accordance with IRS regulations. Reserve funds shall be invested at the discretion of the Board of Directors who shall consider safety of principle as the highest priority, followed by liquidity of funds, and lastly yield. Within these guidelines all funds shall be managed to maximize yield. A 20 year reserve plan shall be maintained to assist in establishing the amount of reserve funds required. The 20 year reserve plan shall be updated every three years and in any year that a major reserve expense occurs.

Studies show that 5 out of 4 people have problems with fractions

JosephW (Michigan)
Posts: 882

Posted:

The association should adopt an investment policy to make sure nobody takes too many chances with it in the future. Investments should be limited to "government backed instruments". There's a sample one on page 7 of CAI's Reserve Guidelines at:

http://www.caimichigan.org/articles/BPRS.pdf

Joe

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LindaC3 (Florida)
Posts: 526

Posted:

Posted By GlenL on 01/06/2007 11:23 AM

Along with Patrick's Association we stagger the due dates and buy CD's looking to get maximum return while keeping the money safe, i.e. do not use it to day trade. Because FDIC only protects $100,000.00 of any tax id number on deposit at any bank; we limit it to $90,000.00 at each bank and start again at another bank or savings in loan. Roger posted an excellent policy for investing Association funds:

Roger B
--------------------------------------------------------
Rules and Regulations on Investment of Reserve Funds

A Reserve fund is maintained to provide adequate funds for future capital investments, such as fencing, landscaping, irrigation, monuments, signs, and contingencies. Reserve funds shall be invested in an account, or accounts, which shall be separate from the annual operating account, in accordance with IRS regulations. Reserve funds shall be invested at the discretion of the Board of Directors who shall consider safety of principle as the highest priority, followed by liquidity of funds, and lastly yield. Within these guidelines all funds shall be managed to maximize yield. A 20 year reserve plan shall be maintained to assist in establishing the amount of reserve funds required. The 20 year reserve plan shall be updated every three years and in any year that a major reserve expense occurs.

RogerB.................With your years of experience with PM I am turning to you for some advice.If the HOA where I reside has a monthly due of XYZ and then an additional "reserve contribtion" of ABC is the HOA suppose to be using ABC to cover what XYZ should be covering ??? It was my understanding that a reserve contribution was money allocated to be set aside for capital improvements or a specific project- not to be used for the day to day operations of the HOA..Please correct me if I am wrong ...Thanks Bunches Linda C

RogerB (Colorado)
Posts: 5,067

Posted:

Linda, you are correct. All money is usually all placed in the checking (operating) account. Then funds are transferred to the reserve account(s) but not necessarily on a monthly basis. We often use a money market account for operating funds which are not immediately needed. This provides more yield than a checking account. Many HOAs use time savings (CD) accounts for reserve funds. Paying close attention to money management has earned $1000's for the HOAs we manage.

PaulH3 (Connecticut)
Posts: 29

Posted:

We use laddered CDs. These expire at different times and allow us to wait no more than 30 days for one to mature in the event that we need the funds.

However, we just took one CD that had matured and placed the funds in a Savings account at HSBC. Yes, that's right, a savings account. They have a special of 6% interest on new money savings accounts. This is better than you will get with most CDs and have instant liquidity if necessary.

JasonC (California)
Posts: 22

Posted:

Correct me if I am wrong. The HOA is supposed to be a nonprofit entity. The HOA will have to pay taxes for the interest. Are the members entitled to the profits?

JosephW (Michigan)
Posts: 882

Posted:

Most associations use the interest to help offset inflation. Since the cost of products and services increases every year, the original reserve plan has to factor that in. Some offset this by applying the interest earnings against it. It wouldn't make much sense to return the money to the owners only to have to assess them more because costs have gone up.

Joe

Joseph West
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Community Associations Network, LLC
www.CommunityAssociations.net
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RogerB (Colorado)
Posts: 5,067

Posted:

Jason, the HOA still is required to pay taxes on interest which is above the standard deduction of $100 when filing form 1120-H. Refunding does not eliminate that requirement. It would be stupid for a Board to send refunds to members each year because this would end up costing the members more money. There is usually no requirement to provide refunds by an HOA nonprofit corporation.

WilliamT (Arizona)
Posts: 489

Posted:

Posted By JasonC on 02/02/2007 10:43 AM

Correct me if I am wrong. The HOA is supposed to be a nonprofit entity. The HOA will have to pay taxes for the interest. Are the members entitled to the profits?

A non-profit organization such as an HOA does not pay taxes on the income from it's primary source of income. It is allowed to earn money from secondary sources such as interest, and renting out facilities, etc. The income from these secondary sources are taxable.

Those profits are not distributed to the membership, however the membrs do derive the benefit from them.

The interest income from reserve fund investing goes directly into the HOA reserve fund. The interest profits help to increase the amount that is in the reserve fund which is used for maintenance and replacement of the property that is listed in the reserve analysis.

When a BOD wisely invests the money to obtain maximum return and maximum protection of capital (CD's are the safest) then it is doing it's job to help keep assessment dues down.

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