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Interest income

Started by RichardP27 • 8 replies • 209 views

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RichardP27 (California)
Posts: 2
Posted:
Our Gm is telling us that the interest income could be 1 dollar or a million dollars and it won’t effect our dues. The reserve study is stating a 70,000 projected interest income when in fact it is over 400,000 dollars. This understating of interest income has to effect the amount of collected assessments being put towards our reserves, hence overcharging us homeowners.
TimB4 (Tennessee)
Posts: 21,059
Posted:
The problem with including interest when setting assessments is that the amount of interest can change yearly dependent on the interest rate and the amount of money in the interest bearing account at any one time.

Now, included interest earned and deposited into the reserves when doing a yearly review of the reserve study would be good as it can offset the inflation and cost of labor increases.
CathyA3 (Ohio)
Posts: 6,299
Posted:
Interest rates (income earned) rarely outpace inflation (spending needs). In other words, increased spending needs will nearly always consume any income you've earned on investments and then some.

People can compare current interest rates with current inflation rates to see this. In addition, associations often can't earn those attractive CD rates that banks use to attract customers. Those rates are for retail customers (ie. people), not businesses (ie. associations). So the gap between earned income and current inflation is even larger than the numbers suggest.

(Investing 101: Historically the only investments that have outpaced inflation are stocks, which are inappropriate investments for nearly all community associations. This is because there's an inverse relationship between risk and reward. Associations need to keep their money in safe investments that guarantee the return of principle: money market accounts, CDs, and the like. These investments are low risk, so their investment returns are low. Investments that return more require the investor to put the principle at risk, which means the money may not be there when you need it.)
CathyA3 (Ohio)
Posts: 6,299
Posted:
Also, reserve studies generally assume that reserve accounts will earn some income. The projected earnings are used to calculate the amounts that must be contributed each year to the reserves. ** In other words, assessment numbers are already taking this into account. ** Re-doing the reserve studies every few years (best practices) will re-adjust those projections as needed.

If you reduce assessments and spend the income, then your projected reserve contributions are too low - and you need to increase assessments to compensate.

In other words, spending the income is robbing Peter to pay Paul. It all comes out of the same source. It isn't magic - it's math.

(I have a little canned speech - with graphics! - explaining why too-low assessments actually increase your spending needs. It's the old adage of the cheapskate spending the most.)

ElleN (Idaho)
Posts: 1,334
Posted:
Quote:
Posted By RichardP27 on 02/16/2025 1:29 AM
Our Gm is telling us that the interest income could be 1 dollar or a million dollars and it won’t effect our dues. The reserve study is stating a 70,000 projected interest income when in fact it is over 400,000 dollars.
Did you post here to see what people think? If so, the GM's blanket statement about interest is wrong. When preparing the annual budget, A board has the right to factor in the interest income and yes, potentially lower assessments. Whether this is prudent depends on the specifics of the HOA's budgeting and reserve planning.
ElleN (Idaho)
Posts: 1,334
Posted:
Quote:
Posted By CathyA3 on 02/16/2025 5:24 AM
Interest rates (income earned) rarely outpace inflation (spending needs). In other words, increased spending needs will nearly always consume any income you've earned on investments and then some.

People can compare current interest rates with current inflation rates to see this.
?

A comparison of interest rates on 3-month CDs (for one) in recent years shows that most of the time, interest rates on 3-month CDs exceeded annual inflation rates.
DouglasK1 (Florida)
Posts: 2,046
Posted:
Keep in mind that for associations that file 1120-H, interest income is typically taxable so you don't get to keep all of it.
Escaped former treasurer and director of a self managed association.
CathyA3 (Ohio)
Posts: 6,299
Posted:
Quote:
Posted By ElleN on 02/16/2025 7:14 AM
Posted By CathyA3 on 02/16/2025 5:24 AM
Interest rates (income earned) rarely outpace inflation (spending needs). In other words, increased spending needs will nearly always consume any income you've earned on investments and then some.

People can compare current interest rates with current inflation rates to see this.
?

A comparison of interest rates on 3-month CDs (for one) in recent years shows that most of the time, interest rates on 3-month CDs exceeded annual inflation rates.

Those quoted rates are pre-tax and paid to retail customers (not businesses/associations). Business customers earn much less. It may be possible to find rates closer to retail at things like credit unions. Keep in mind, banks set CD rates at a level where they're not losing money. If CDs were such a good deal, pension and retirement plans would keep the money invested in them, and professional investors wouldn't have to knock themselves out trying to find good investments.

In addition, associations need to worry about inflation in certain sectors of the economy. A hot housing market and supply chain issues can result in higher inflation in the costs of lumber and other building materials, which are things that associations compete for. This happened during the pandemic. Meanwhile we mostly don't care about inflation in food and beverages, apparel, recreation, education and communication, all of which are included in the CPI. So the association's expenses can and will increase at a level higher than the inflation rates you hear quoted on the news.
DeanJ
Posts: 1,786
Posted:
Quote:
Posted By ElleN on 02/16/2025 7:14 AM
Posted By CathyA3 on 02/16/2025 5:24 AM
Interest rates (income earned) rarely outpace inflation (spending needs). In other words, increased spending needs will nearly always consume any income you've earned on investments and then some.

People can compare current interest rates with current inflation rates to see this.
?

A comparison of interest rates on 3-month CDs (for one) in recent years shows that most of the time, interest rates on 3-month CDs exceeded annual inflation rates.

Usually a reserve study anticipates inflation associated with construction contractors, not the consumer price index.

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