Rent Real EstateReserve Fund Investment Strategies
How can the association maximize its return on reserve funds (money set
aside for major repairs and replacements)? The starting point is a Reserve
Study. A Reserve Study allows the Board to realistically anticipate its
reserve expenses 5-30 years into the future. If your Board has wisely
invested in a Reserve Study, the next step is to prudently invest the money
while it waits to be used.
All too often, reserve funds are deposited into either a money market
checking or passbook savings accounts so the funds will be immediately
accessible. The rate of return offered in these accounts is often below
inflation so to leave it there will erode the value. Your association
governing documents [CC&Rs] sometimes restrict reserve investments to those
insured by the federal government. If they don"t, there is some latitude in
directing the funds into higher return investments. Stocks are usually not
recommended due to the higher risk involved. Fortunately, there are several
investment strategies that can produce higher returns with low risk.
Zero to Five Year Strategy
Staggering or laddering. This strategy allows the association to invest in
treasury bills and CDs (certificates of deposit) that mature at different
times. Because the investments mature at predictable intervals, the
association maintains a steady cash flow and the flexibility to change its
investments.
Let"s take a look at a CD investment strategy using staggering. In this
example, based on the Reserve Study and future cash needs, the Board invests
one third of available reserves in a one-year CD. In month four, another
third is invested in another one-year CD. In month eight, the remaining
third is invested in another one-year CD. In month one of the next year, the
first CD matures. If the funds are not needed, the CD is renewed for another
year. Or, if only a portion is used, the remainder is rolled over.
Additional reserve funds that have been collected by this time can either be
added to the CD or another CD can be purchased.
This process can be used with any term CD. It can be adapted so funds mature
more or less often, depending on the needs of the association. For example,
a new association that won"t need funds for some time may be able to
consider two or even three year CDs in their portfolio. The longer the term,
the higher the yield. This process can be used with other investments or
only a portion of the reserve funds. A Reserve Study is an educated estimate
and that a contingency or emergency fund of 5-10% should be factored in.
5+ Year Strategy
Asset Allocation. All investments have two components: level of risk and
rate of return. The higher the risk, the higher the return...the lower the
risk, the lower the return. (Risk is measured by volatility or how much a
given investment"s value fluctuates). Asset Allocation is an investment
concept that previously was available only to large institutional investors.
It is now available to modest investors due to computer technology. Asset
Allocation provides a proven plan to maximize return while maintaining a low
level of risk. Under this plan, reserve funds are invested in multiple asset
class mutual funds [For example, reserve funds are invested 30% stock funds,
30% bond funds and 40% cash funds] and the performance is monitored. If
changes occur in the allocation percentages, the portfolio is rebalanced to
bring it back in line. This allows the association to take advantage of a
diversified portfolio that can generate a higher rate of return than say,
CDs, with no more appreciable risk.
Conclusion. It"s time to get off your reserve assets! By using a Reserve
Study to develop holding periods and reserve amounts, the association can
take advantage of higher return investments with lower risk. Higher reserve
growth means the association will be able to reduce fees to its members over
the long haul. Lower fees make happier owners and enhance property values.
For more information on this subject, see www.Regenesis.net.