Investing HOA Funds

Started by JayB2 • 11 replies • 4878 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

JayB2 (California)
Posts: 4

Posted:

I'm quite discouraged by the abysmally low interest rates most banks and financial institutions are paying on money markets, accounts, CD's, etc. Each time I see our HOA's financial statements, the return on our reserve funds are absolutely laughable.

I know some HOA's have more stringent guidelines about how or in what investments reserve funds should be invested, ours doesn't seem to have any spefific guidelines.

Obviously, risky investments are out of the question... but it would be nice to see some better yields.

So, here's the situation:

I am in a unique position as a member of the HOA board and also employed at an investment firm. I have access to a broad spectrum of investments (fixed income, ETF's, mutual funds, stocks, money markets, you name it). I have access to the full market - not just what the local bank is trying to push on their customers. Also, I can buy/sell with zero commissions because of my status within the firm.

Assuming the board agrees on a resonable array of investment options, could an arrangement like this work? Pitfalls? Concerns?

What are your own experiences with HOA investing reserve / excess funds?

All thoughts welcome!

DanielH1 (California)
Posts: 482

Posted:

One pitfall would be that, for whatever reason, you are no longer involved with the Board and the Board mismanages the investment and loses the money. But, as long as you expect to be around for the foreseeable future, your plan makes sense and should benefit the HOA.

My experience is that it personally isn't worth the risk or the trouble. Many HOA treasurers are unsophisticated and/or incompetent so it is sensible to limit them to simple savings accounts. Also, investing HOA money means that there is no personal reward for a good investment but there is blame and threats for one that goes sour. Heads, you tie; tails, you lose.

ChristinaR (Maryland)
Posts: 99

Posted:

Look into online savings accounts. Obviously check to make sure they are insured and official institutions. But some online savings accounts offer a 1-2% interest rate with zero penalties if you have to touch it early.

PeterB1 (Florida)
Posts: 257

Posted:

Jay,

The question you need to ask yourself - Is there sufficient gain to make the risk worthwhile? Our bank approached me (Treasurer) and asked if I would consider investing our reserve funds that are currently at another bank.

When we discussed the actual return, it would have been less than $100 per year. For that amount, it wasn't worth doing the paperwork, nor the hassle.

With interest rates so low, doubling the rate you are getting doesn't really matter - like .05% to .10%.

peter

JeanneK3 (Maryland)
Posts: 562

Posted:

Jay:
Last week I read about a condo association in Washington, D.C. that had invested its entire 3 million dollar reserve fund with Bernie Madoff. Need I say more-----
Jeanne

JayB2 (California)
Posts: 4

Posted:

Good points people...

GlenL (Ohio)
Posts: 5,491

Posted:

Jay, you might want to check this link out: http://www.davis-stirling.com/MainMenu/MainIndex/InvestingReserves/tabid/1503/Default.aspx

It is to an California HOA attorney's website and is their opinion on investing reserves.

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

DavidW5 (North Carolina)
Posts: 565

Posted:

Jay,

Sounds to me like you are willing to take on significant investment risks with other people's money. The only risk you might avoid with your approach is the risk that your reserve funds do not grow as fast as inflation. In exchange you risk actual loses. Our association has a written investment policy that mandates preservation of capital as the highest priority and limits investments to FDIC insured investments. We are finding 12 to 18 month CD's paying slightly over 2%. We ladder these so that one matures approximately every 6 months. Until interest rates begin to rise we will stick with these short maturities.

If someone in my association proposed what you are suggesting I would strenuously object.

JayB2 (California)
Posts: 4

Posted:

Quote:

Posted By DavidW5 on 06/16/2010 4:40 PM
Jay,

Sounds to me like you are willing to take on significant investment risks with other people's money. The only risk you might avoid with your approach is the risk that your reserve funds do not grow as fast as inflation. In exchange you risk actual loses. Our association has a written investment policy that mandates preservation of capital as the highest priority and limits investments to FDIC insured investments. We are finding 12 to 18 month CD's paying slightly over 2%. We ladder these so that one matures approximately every 6 months. Until interest rates begin to rise we will stick with these short maturities.

If someone in my association proposed what you are suggesting I would strenuously object.

Well, I didn't mention any specifics.... objections already? Sounds just like my board.

Of course whatever is invested would be principally protected. A good number of AAA munis offer market liquidity, principal protection, and better yields than CD's. There are also the tax benefits to investing in munis (not had with most CD's). Also, this would probably be only for a small overall portion of the available funds, keeping a good portion in more traditional positions.

I haven't actually proposed this... which is why I'm coming to you guys for opinions.

DavidW5 (North Carolina)
Posts: 565

Posted:

Jay,

Your original post did mention ETF's, stocks and mutual funds. That's what I was referring to. Those are never appropriate for investment of association reserve funds.

JayB2 (California)
Posts: 4

Posted:

Quote:

Posted By DavidW5 on 06/17/2010 7:17 AM
Jay,

Your original post did mention ETF's, stocks and mutual funds. That's what I was referring to. Those are never appropriate for investment of association reserve funds.

Ah, I was describing how I had full access to all investment products... I also did say that I wasn't looking at risky stuff. Sorry for that confusion.

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Quote:

Of course whatever is invested would be principally protected. A good number of AAA munis offer market liquidity, principal protection, and better yields than CD's.

How quickly we forget all the housing investments that were once AAA... are now rated junk status. Worthless. When a whole bunch of AAA-rated debt starts going belly-up, it calls into question the entire ratings system.

I'm with everyone else. Leave the reserve accounts alone with the small interest rate. At least its safe and it can be liquidated immediately in case of a disaster.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here