Picking the Right Investments for Your Community

Community associations and their respective board members play a key role in managing the common areas and facilities of a residential community. They are responsible for the maintenance, repair, and upkeep of various assets, including swimming pools, clubhouses, playgrounds, and landscaped areas. Not to mention the overall value of their community assets. To fulfill their responsibilities, community associations require a steady stream of income from various sources, such as membership fees, assessments, and, yes, reserve investments. In this brief overview, we will discuss the importance of picking the right investments for your community association and provide some tips on how to do so.

Proper and prudent investing can help community associations generate additional income and build up their reserve funds for future repairs, replacements, and refurbishments. However, any type of investing also comes with risks and potential losses. Therefore, it is essential for community associations to carefully evaluate their investment options and make informed decisions that align with their financial goals, risk tolerance, and legal obligations. Please remember that as a board member you have a fiduciary obligation to your owners to protect, maintain, and enhance the community for all stakeholders.

The first step in picking the right investments for your community association is to establish a clear, concise, and formal Investment Policy Statement (IPS). This policy should define the association’s objectives, constraints, and procedures for investing its funds. It should also specify the roles and responsibilities of the board of directors, investment committee (if applicable), or authorized individual(s), and finally your investment advisor. The investment policy should be reviewed and updated periodically to reflect changes in the association’s financial situation, market conditions, and regulatory requirements. Hiring a professional financial advisor that specializes in community associations is the easiest way to assure all the above is covered.

One of the key objectives of a community association’s investment policy is to preserve capital while earning a reasonable rate of return. This means that the association should avoid investments that are too risky or speculative, as they could lead to significant losses that may impair its ability to fund its operations and capital projects. On the other hand, the association should also avoid investments that are too conservative, like leaving funds in a bank or savings account as they may not generate enough income to meet financial obligations and goals. Therefore, the association should aim for a balanced portfolio that includes a variety of FDIC insured investments and/or US Government guaranteed vehicles that offer a wide range of returns and maturities.

Of critical importance is doing an annual review of the association’s reserve study, budget, and cash flow requirements. A simple analogy is like going to the doctor every year for your annual physical. This type of review allows you to make changes along the way, yet provides a formal road map that gives direction for the board, management company, and transparency for your owners.

Another important consideration when picking investments for your community association is the legal framework that governs the association’s investments. Most HOAs have CC&Rs which you were probably given when you bought into the association. Many are subject to state and local laws, which may regulate the association invests its funds. Remember the board is also subject to the fiduciary duty of care and loyalty, which requires the directors and investment committee to act prudently, in good faith, and in the best interests of the association and its members. Therefore, HOAs should seek the advice of legal and financial professionals who also act in a fiduciary capacity, to ensure that their investments comply with applicable laws and standards of care.

One of the most common types of investments we always see in community associations is cash and cash equivalents, such as money market accounts, certificates of deposit (CDs), and short-term Treasury vehicles. These investments are considered low-risk and provide liquidity and stability to the association’s portfolio. However, they also offer lower returns than other types of investments, and their purchasing power may be eroded by inflation over time. Welcome to 2023 and 8 percent or higher inflation.  

Unfortunately, over the last decade since the Great Recession, we have witnessed many associations make the mistake of investing their funds with the promise of higher-yielding assets, such as mutual funds, stocks, and exchange-traded funds (ETFs), which offer the potential for capital appreciation and income. I like to tell people I don’t have a crystal ball nor can I out guess the Fed’s next move. I do know that financial markets are volatile and as Murphy’s Law proves over and over, the minute you need those funds, the value will most likely be less than their purchase price.

For associations that have a longer investment horizon, there are actually FDIC insured investments that can potentially generate higher returns over the long term with safety of principal to protect against downturns in the economy. Associations should diversify their portfolio and review their specific cash flow needs every year, being mindful of any fees and expenses associated with these investments.

In conclusion, picking the right investments for your association requires careful planning, evaluation, and management. Associations should establish a clear investment policy that aligns with their financial goals, risk tolerance, and legal obligations. They should have a diversified portfolio that assures a range of returns and maturities. And most importantly, Associations should always seek the advice of legal and financial professionals to ensure that their investments comply with applicable laws and standards of care. By making informed investment decisions, associations can generate additional income, build up their reserve funds, and better serve their members in the future. 

Helping You Build a Firm Financial Foundation For Your Future

Nico F. March is the Managing Director for The March Group, LLC. He has worked with Community Associations since 1974 and has served on several Boards, including the Board of Directors for the Community Association Institute (CAI), San Diego Chapter. His team has specialized in Corporate Cash and Association Financial Management since 1982 and has assisted over 1000 Associations, Nonprofits and Timeshares invest over $4 Billion in reserve, operating and reconstruction funds. Nico and his team work out of their San Diego and Wyoming offices and may be reached at 888.811.6501 or email [email protected] for further information and consultations.

The March Group is not a tax or legal advisor. We will be glad to work with your professional CPA and Attorney to help you with your financial goals. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. Nico March is a registered representative with, and securities are offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual or organization.


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