1. Adequately fund a reserve account from the beginning.
The fastest way a community runs into financial heartache and a low funding level is by having an allocation rate to the reserve account which is not enough to offset the long-term project costs. In the short term this practice will often result in lower HOA dues but in a relatively short period of time the Association will be in a situation where dues will need to be increased significantly (penalizing owners for a lack of funding in the past). The fairest, most fiscally responsible and cheapest way to fund reserve accounts is to start off on the right foot and fund an adequate amount from the beginning. A reserve study will provide the necessary direction and allocation rates necessary for a newer community to do just that.
2. Keep up on maintenance
Annual maintenance of common areas such as touching up paint, roof repairs, gutter cleaning, carpet cleaning, etc all help to extend the useful life of components. The longer a community can responsibly push off replacing common areas the more time an Association has to fund for the associated costs for them; reducing the needed allocation rate along the way. Small maintenance costs (such as annual roof inspection & repair) can often extend a component’s useful life by several years which is a huge benefit to the membership of a community without having deferred maintenance issues.
3. Complete common area projects promtly when needed
There is often a desire to try and maximize the useful life of a common area past when it has stopped functioning as designed; this is common with roofs and asphalt surfaces. Unfortunately, trying to maximize the useful life too much will often result in a much higher project cost than should have been the case.
Example: A roof which is leaking will cause damage to other areas of the building and interior units which is extremely costly to repair. Example 2: an asphalt road which does not received an Overlay (resurfacing) at an appropriate time often will deteriorate to the point that the Vendor will only be able to complete a Replacement project… at twice the cost. Ignoring or deferring the project expense past when it is appropriate to do so has simply resulting in a much larger project expense to the Association.
4. Do not “double dip” into the operating account and the reserve accountWe most often see this with smaller mechanical equipment, tree trimming, painting and asphalt/concrete repair. If a common area component is being paid for with the operating account budget, then there is no need to fund for it in the reserve account. Doing so unjustly double charges the membership for the same item. Note however that there are maintenance items related to common areas which are separate from the reserve replacement costs. Example: pressure washing the siding which is typically paid from the operating account versus replacement of the siding which is funded from the reserve account.
5. Invest a Portion of the Reserve Account
Investing in extremely safe government backed instruments allows an Association to collect a higher return than just the standard interest rate on a savings account. With large enough funds this can play a significant role in the long-term financial strategy developed and will typically result in lower needed reserve allocation rates. A reserve study will provide a timeline of expected costs over a 30-year period; it is important to review and consider the project costs over this time period so that money that is invested can be removed and placed into a liquid account to pay for larger project expenses and without penalty for doing so. Note that we recommended only a portion of the account be invested at any time.
Written by Joel L Tax - Professional Reserve Analyst - 01/17/2019