What is the HOA reserves rule of thumb?

A common HOA reserves rule of thumb is to keep reserves funded at least 70% of the recommended target from the reserve study. Boards should also update reserve studies every three to five years, review funding levels during each annual budget cycle, and keep reserve funds in safe, interest-bearing accounts.

Why are reserve studies important for HOA boards?

Reserve studies help HOA boards plan for future expenses by reviewing major shared components, estimating their remaining useful life, and calculating how much the association should set aside each year. They also improve transparency by helping homeowners understand reserve contributions and possible assessment increases.

HOA Reserve Funds: A Guide for Board Members and Homeowners

Q: What are HOA reserve funds?

HOA reserve funds are money set aside for major repairs, replacements, and long-term community expenses. They are separate from the operating budget, which covers regular costs such as utilities, landscaping, routine maintenance, and management fees.

Q: How much should an HOA have in reserves?

There is no single amount that applies to every HOA. The right reserve balance depends on the size of the community, the age of its shared components, the number of amenities, and expected repair or replacement costs. A professional reserve study can help the board determine the proper funding target.

Q: Can HOA reserve funds be used for operating expenses?

HOA reserve funds generally should not be used for operating expenses. Reserve funds are intended for major repairs, replacements, and long-term capital needs, while operating funds pay for everyday association costs. Using reserves for operating expenses can weaken the HOA’s financial position and leave the community unprepared for major repairs.

One crucial factor needed in keeping a community’s finances stable is the HOA reserve funds. It’s an account that can save the association and its members from large-scale expenses and surprise assessments. But what does it entail?

What are HOA Reserve Funds?

Simply put, the reserve fund is another account where money is set aside specifically for major repairs or replacements and long-term community expenses. This fund is different from your association’s operating budget, which pays for the regular costs of running the association.

Why HOA Reserve Funds Matter

There are several benefits to keeping a well-funded reserve fund for your homeowners’ association. These include the following.

Reduces the need for special assessments: With an adequately funded reserve, your association can afford major repairs without suddenly charging homeowners an additional fee.
Helps the HOA prevent delays in essential repairs. The board can easily approve and complete essential repairs as soon as possible when funds are available.
Improves financial stability. A well-funded reserve helps your HOA become more flexible when managing larger expenses or unexpected costs.
Reduces the need to borrow money. With sufficient savings, the HOA may avoid loans, interest costs, and additional financial obligations.
Strengthens buyer and lender confidence. Healthy reserves can indicate that the association is prepared for future expenses and is managing its finances responsibly.

What Reserve Funds Usually Cover

Your HOA’s reserve funds usually pay for common area components that have a limited lifespan, such as roofs on shared amenities and sidewalks. The association is usually responsible for maintaining and repairing those components.

While it’s good to have them, your reserves shouldn’t be seen as extra funds the board can use for whatever projects it wants to pursue. Instead, the board should use these funds to support already-planned capital needs and component replacements, as supported by a reserve study.

How Much Should an HOA Have in Reserves?

There’s no one answer as to how much your HOA should have in its reserve fund. The amount will depend on several factors, such as the size of the community, how old it is, how many shared amenities it has, and its repair needs.

Smaller HOAs with a few common assets may need a smaller reserve balance. Meanwhile, larger communities, or even condominium associations with more shared elements, will likely need more.

How Reserve Studies Help Boards Plan

The best way to know how much your HOA will need is by conducting an HOA reserve study. Professional reserve studies provide HOA boards with a better overview of future expenses.

The study reviews your HOA’s major shared elements and components, estimating their remaining useful life. It also calculates how much the association should set aside annually for future repairs and replacements.

This helps the board make informed budget decisions. Instead of randomly setting a reserve contribution amount, the study provides a structured plan and a target.

Reserve studies also provide transparency, helping explain increases in HOA dues to homeowners. When residents understand the need for higher contributions, especially for future capital projects, they may be more accepting of it.

HOA Reserves Rule of Thumb

A common rule of thumb when managing HOA reserves is to maintain its funding at at least 70% of the recommended number in the reserve study. By doing so, the association will have better capacity in covering the costs of major repairs without relying on special assessments.

Other best practices for HOA boards include having a professional reserve study done every three to five years. They should also review funding levels every annual budget cycle.

Your association’s reserves should be kept in safe and interest-bearing accounts that are consistent with what’s indicated in governing documents and state laws.

Can HOA Reserve Funds Be Used for Operating Expenses?

No, reserve funds and operating funds should be kept separate. Even if it’s tempting, especially in times of need, your association shouldn’t tap into your reserve funds for operating expenses.

Operating expenses are the regular costs that run the association every day. These include costs for general landscaping, regular maintenance, management fees, and utilities.

If you use reserve funds to pay for these, it may weaken the HOA’s financial position. It will also likely create issues if a major repair is needed and your reserves are already spent.

Common HOA Reserve Fund Mistakes

Many common mistakes that HOA boards make can weaken your community’s financial position. Here are some that you can avoid to ensure your HOA remains prepared for future possible expenses:

Underfunding Reserves: Some boards may keep their reserve contributions too low to avoid a sharp increase in their HOA dues. This is ok in the short term, but it can also leave your association without enough funds for major repairs and replacements. Underfunded reserves usually result in either special assessments or delayed repairs or projects.
Not Having Reserve Studies: If your HOA doesn’t have reserve studies done regularly, their estimates for reserve contributions and future expenses may be off. Having a reserve study will help your board plan contributions based on what your community needs.
Ignoring Inflation: Inflation is an inescapable part of economics. The costs of labor and materials usually rise significantly over time due to inflation. If your HOA board fails to adjust reserve estimates to those increases, they may find that the reserves won’t have enough money to afford repairs and replacements.
Delaying Major Repairs: Delaying necessary repairs of common elements will save your HOA money temporarily. However, the damage can worsen and become more expensive later on. With timely maintenance, you also extend the useful life of community assets.

Creating Long-Term Stability

Having a properly funded HOA reserve fund is essential for protecting the financial health and physical condition of a community. When your HOA board plans ahead and residents can understand the purpose of reserves, the association is better prepared for future repairs and long-term stability.

Creative Management Company offers association management services to HOAs and condo communities in Greater Houston. Call us today at 713-772-4420 or contact us online to learn more!

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