An HOA investment policy establishes clear controls for investing an association’s reserve funds. This policy seeks to safeguard reserves and ensure that a community meets its future obligations. Associations that have yet to adopt an investment policy should do so immediately.
What is an HOA Investment Policy?
In an HOA setting, an investment policy refers to the guidelines that an association must follow when investing its reserves. This policy outlines how reserve funds must be prioritized, protected, and allocated.
In Virginia, both HOAs (Section 55.1-1826) and condominiums (Section 55.1-1965) must budget for reserves if their reserve study indicates a need. These reserves cover the cost of major repairs and replacements when capital components reach the end of their useful life. Yet, these statutes don’t regulate how boards must handle an HOA investment.
Can an HOA Make Investments?
In general, an HOA or condo association can invest its reserve funds, but boards must strictly comply with state laws and their governing documents.
In Virginia, neither the Property Owners’ Association Act nor the Condominium Act provides any guidelines for HOA investments. Instead, association boards must refer to the CC&Rs and bylaws to understand their investment policy.
Some governing documents prohibit risky investments altogether, only allowing basic savings accounts. Meanwhile, other communities may invest in treasuries or bonds with board approval.
What are the Types of Investments for HOAs?
There are three general types of investments an HOA can make: cash or savings, short-term fixed-income investments, and long-term fixed-income investments. Let’s discuss each type below.
1. Cash or Savings
Cash or savings accounts are the most basic types of investments. Associations should choose this option if they are looking for high liquidity, with immediate access in case of emergencies. Examples of vehicles include insured bank money market and savings accounts.
2. Short-Term Fixed
Short-term fixed investments lock in the funds at a fixed interest rate or return over a brief period. The timeframe typically ranges from a few days to three years. These investments are low-risk, making them favorable among risk-averse associations.
If an HOA expects to draw on its reserves over the next three years, short-term fixed-income investments are a good option. These investments tend to be stable and predictable while still providing yield. A common example is a Certificate of Deposit (CD).
3. Long-Term Fixed
Long-term fixed investments lock in the funds at a fixed return rate over a longer period, usually five years or more. This is ideal for communities that wish to protect their reserves against inflation and have no predicted need for them within the next five years. Common examples include U.S. Treasuries and multi-month laddered CDs.
What to Include in HOA Investment Guidelines
An HOA reserve funds investment policy should strike the right balance among safety, liquidity, and yield, while establishing authorization controls for the board and reporting requirements to ensure transparency. Let’s break this down below.
1. Safety as a Priority
An association’s reserves are indispensable. They cover the cost of capital repairs and replacements in the future, which is why it is important to put safety first. This means prioritizing the protection of the principal amount over high yields.
Boards should look for an investment plan that comes with little to no risk. They must also ensure that their investments are fully FDIC-insured. It may be worth establishing a pre-approved list of vehicles that includes savings accounts, money market accounts, treasury bills, and CDs.
Stocks, non-government bonds, and mutual funds are common examples of highly volatile investments. Associations should avoid them as much as possible.
2. High Liquidity Needs
An association’s reserves aren’t designed to sit in an account forever. At some point, boards must tap into these funds to cover major repairs and replacements of capital components. Because of this, liquidity is a must.
When choosing an investment plan, boards must match the maturity dates with expected repairs or replacements. If an HOA expects to replace its clubhouse roof in three years, for example, a short-term fixed investment is the best option.
Long-term fixed investments offer both stability and yield, but they lock in the funds for an extended period. For associations with immediate or near-immediate needs, it may be better to avoid this type of plan. Withdrawing from a long-term fixed investment before its maturity date can result in lower interest rates, interest forfeiture, or an early withdrawal penalty.
3. Yield as a Last Consideration
Some associations are enticed by high yields or return rates, but these usually come with a trade-off. In general, the higher the projected yield, the riskier the investment. An HOA stands to lose some or all of its principal amount.
Remember that the reserve fund is essential to preserving long-term property values, and boards have a fiduciary duty to protect it. Prioritizing yield at the cost of safety and liquidity may be a breach of this duty. A high interest rate means nothing if the HOA squanders the original sum.
4. Board Authorization
Many associations require majority board approval before large investments, transfers, or early liquidations. This adds a layer of protection and ensures that the board does its due diligence before authorizing major actions.
Depending on the bylaws, the HOA board typically conducts this vote at a properly noticed open meeting. The meeting minutes must clearly reflect the vote and include a board resolution for proper documentation.
5. Reporting Requirements
An HOA investment policy isn’t complete without reporting requirements. Board members have a duty to maintain transparency within the community. This means sharing information with homeowners on all association-related matters, including finances.
At regular board meetings, the HOA board must present the monthly investment status of the reserves. Homeowners should also be able to examine or ask for a copy of this report upon written request.
A Solid Plan
Investing reserves can be a great move for any association, but it comes with certain limitations. A good HOA investment policy must impose clear controls and requirements to protect the reserve funds. It must prioritize safety and liquidity, require board approval, and mandate transparent practices, with yield as a last consideration.
National Realty Partners is a leading provider of association financial management services in Virginia, Maryland, and Washington, DC. We can help your board with rule enforcement. Call us today at 703-435-3800 or request a proposal online!
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