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Investments should be made with the proper authority, help and caution.
Your homeowners association (HOA) has diligently been adding to its reserves account and now would like to invest that money to possibly grow it even more. As a nonprofit, your HOA has the ability to generate income on your reserves. But should you? The answer depends on several factors. (If you need to build your reserves before you can begin investing, a reserve study could help.)
Your HOA’s investment policy
The governing documents of your HOA include rules and policies about your reserves and may include an investment policy. Often, this language is vague if included at all. To ensure that funds are treated consistently and that all homeowners in your community are aware of and understand the reserve investment policy, it’s a good idea to talk with an attorney, accountant or HOA management firm to create a more structured policy. Most policies take a more conservative stance, providing the opportunity to invest reserves as long as the principal remains untouched.
Your fiduciary responsibility
As a member of the board, you’ve been appointed to manage your HOA’s reserves and to act in the best interests of your community’s homeowners. Because of this, many HOAs will only choose investments that protect the principal of their reserve accounts, such as certificates of deposit (CDs) or some other interest-bearing account. If your board chooses to go this route, your reserves likely won’t grow as much as they might in riskier investments, but you’ll have the security of saving your principal with the bonus of earning a few extra dollars.
Your knowledge of investment options
Those on your board come from a variety of backgrounds, which may or may not include a strong understanding of financial markets and investments. Never fear—you don’t have to go it alone. You can hire an investment advisor familiar with HOAs to help, which can be especially important if your HOA has large reserves. But remember, even if you hire an investment advisor, it is still your fiduciary responsibility to keep tabs on all actions made by that advisor.
However your board decides to invest its HOA reserves, it’s important that you’ve thoroughly researched all investment options. After all, you’re investing with other people’s money—including yours.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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