How to Invest HOA Reserve Funds: Smart Cash Management for Homeowners’ Associations

Cash is important to your association. And perhaps most importantly, it’s everybody’s money, so if you are a board member you must treat it as if it’s as important as your own. It needs to be protected, and it needs to productive. But how do you do that?

Let’s start with the basics. There are three main things that are critical when it comes to cash management. In order of importance they are:

Capital Preservation – In other words, don’t lose any of it!
Liquidity – Make sure you have access to it when you need it.
Interest, or Yield – Your money should make more money.

So how does one achieve these three goals? Let’s go one by one.

If you don’t want to lose any of your cash, it must be invested very conservatively, and that means low risk. Low risk type investments are, bank accounts, credit union accounts, certificates of deposit and money market accounts. It is important to note that these options offer federal insurance up to $250,000. This is as safe as it gets. But what if you have more than $250,000, or you simply want a better interest rate? There are companies that offer accounts that can go up to millions of dollars of federal insurance coverage by connecting with multiple banks to provide insurance up to $10 million. It’s still just one account for the HOA, which makes it very convenient. And even if you have less than $250,000 the interest rate tends to be much higher than using the same single bank that most HOAs stick with every year without shopping around. With the recent economic uncertainty caused by COVID, these extended federal insurance products are growing in popularity. IntraFi Network, and Landing Rock Cash Management are two such companies that offer cash management accounts with extended insurance coverage. You can find more information about federal insurance coverage here, https://www.fdic.gov/resources/deposit-insurance/.
Some of your cash is needed to pay bills on a daily basis, some cash is needed bi-weekly for payroll for example, and some cash may be piling up in your repair and replacement reserves. It’s good it break-down your total cash into these types of “buckets” to determine your liquidity needs. If you need $1,000 to pay bills on any given day, this means you require daily liquidity. It’s best to keep this in a checking account. Cash that’s needed on a weekly or monthly basis you may choose to put in a money market account or an account like Landing Rock or Promontory offers. Cash that’s needed 1 or 2 years from now you may want to put into a certificate of deposit.
While your cash may sometimes may not look impressive, it has value for the companies you keep it with, and they pay for that value in interest, or yield. How do you know how much you can get? An internet search for “high interest checking and savings accounts”, or “best CD rates” will generate lots of options. But with today’s low interest rates, it’s easy to think that this isn’t important. So to keep your eye on the prize, try translating the difference in interest rate into something that’s tangible. For example, perhaps you have $100,000 in an account at a bank that is paying .06% interest, and there is another bank paying .75%. That additional .69% on $100,000 means an extra $690 per year. Envision it as an electrical repair bill, a pool maintenance visit, or replacement of landscape plants. Smart board members know the value of good cash management. Another resource for general HOA information can be found here, https://www.caionline.org/pages/default.aspx

Disclosure: Insights content is not financial advice. Please be sure to do your own due diligence and speak to your financial advisor before making any investment decisions.