Rent Real EstateHomeowner Associations: How To Build Reserve Fund Assets
As homeowner associations across the nation discover the advantages of adopting long-range reserve plans, opportunities to multiply the rewards present themselves.
Reserve planning identifies predictable expenses like painting, roofing and paving and charts a 30 year plan for maintenance and funding. It"s a roadmap that the Board can follow from year to year and establishes a funding plan that is fair to all owners and will usually avoid the need for special assessments. So what"s the phenomena?
One of the big advantages of advance planning is that current owners can pay a fair share of the cost. This is as it should be. Since current owners are "using up" these assets, they should share in the cost to repair or replace them. If all owners put in their share...guess what? No More Special Assessments! Hurray!!!
Reserve funds should be kept in a separate, interest bearing account of some kind. While the association can theoretically invest in stocks and mutual funds, usually the Board chooses some insured investment like a Certificates of Deposit or a Money Market Account. The Reserve Study allows intelligent investing because the Board knows when funds are needed. For example, if the next reserve expense isn"t going to take place for three years, why not purchase a 3 Year CD to maximize the interest yield?
Take our mythical Nottacare Condominiums for example. Nottacare is a 53-unit property that is underfunded, reserve-wise.
They have $35,000 in the bank which is only 18% of what they should have according to their professional Reserve Study. The Board currently has reserve funds invested in a 3% Money Market Account. It is committed to following the recommended owner reserve contribution and maintenance plan. Based on the plan, 3% interest yields $199,793 over 30 years. Not bad, you say! But wait! 3% only matches the current inflation rate so the net effect is ZERO. But one year 7% CDs are available. If the Board invested the same reserves at 7%, all other factors remaining the same, the interest yield would be...hold on to your calculators... $541,738. After taxes, this translates into a $239,356 reduction in owner contributions or almost $8000 per year average! That"s not chump change.
This is the phenomena of compound interest: Increasing the interest yield only a couple of percentage points can translate into HUGE savings for the owners. So, reserve planning is not only fair to all owners, it can actually save you a pile of cash. For more on this subject, see www.regenesis.net