How much should an HOA have in reserves?

What are HOA reserves?

HOA reserves are funds set aside for the repair or replacement of major common area components over time. They are not used for daily operating expenses but instead cover large-scale projects or capital improvements like roof replacement, road resurfacing, or pool refurbishment. These funds help maintain the community’s infrastructure and amenities without sudden financial strain on homeowners. The question of how much an HOA should have in reserves starts with understanding exactly what those reserves are meant to cover and when they will be needed.

This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
 

Reserve study vs. funds

A reserve study is a professional analysis of your community’s common assets, their expected lifespan, and the estimated cost to repair or replace them. The resulting report recommends a funding plan that guides how much the HOA should contribute to its reserve account each year. While the reserve study calculates future needs, the reserve fund is the actual cash set aside to meet those needs. Without an up-to-date reserve study, any funding target is just a guess.
 

How much should an HOA have in reserves?

Reserve funds that are funded at 70–100% are considered good. Your HOA reserves should be funded as close to 100% of their "ideal funding level" so that you can avoid a special assessment. The ideal funding level represents the funds an association has stored for when components need replacing and will vary depending on how far away from this figure your community is at any given time. Reserves funded at 70% or more are considered safe and not in danger of a special assessment; however, reserves funded at 30% or less require immense effort just in terms of making up differences and a special assessment will almost certainly be needed.

In our recent HOA budget survey, 72% of board members indicated that they weren’t confident in operating funds or in the returns they were getting on their reserve funds. HOA reserve funds are extremely important, and to help, we’ve outlined six ways to get the most out of your reserve funds (including one you likely haven’t even heard of).
 

Consequences of underfunded reserves

Underfunded reserves can create immediate and long-term problems for a community. Common consequences include:

• Special assessments: Homeowners may face large, unexpected bills to cover major repairs.
   
• Significant dues increases: Boards may need to raise monthly fees to catch up.
   
• Difficulty obtaining loans or insurance: Lenders and insurers may view low reserves as a risk.
   
• Deferred maintenance: Needed repairs may be delayed, leading to more costly damage.

When boards ask how much should an HOA have in reserves, they should also consider the risks of falling short and the impact on property values.
 

How to improve returns on your reserve fund

1. Only invest in money market accounts and CDs.

   Your responsibility as a board member is to protect the assets of your association. That means only investing in FDIC-insured money market accounts and CDs, avoiding risky investment vehicles like mutual funds or bonds altogether. Even without intent to do harm, some boards choose risky investment vehicles, which can lead to consequences. For instance, if one of those investments falters, you may not have the necessary reserve funds to complete a planned maintenance project.
   
   Additionally, if a board member invests in a risky vehicle, there may be legal consequences. If reserves are invested improperly, a resident could sue the board of directors for breaching their fiduciary duty and putting the funds of the community at risk. By solely investing in FDIC-insured money market accounts and CDs, you protect your association and community.
    

2. Trust HOA professionals for investment advice.

   It is important for boards to have a full understanding and insight into their community's finances and reserve funds. HOA boards should look to their community management company and financial services provider to help make sound investing decisions. Some boards research investment information themselves via the internet or financial publications, which is time that may be better spent creating better HOA policies.
   
   Karla Chung, vice president of FirstService Financial, FirstService Residential’s financial partner, said,

   "The problem we see is when board members take on too much themselves. They may perform hours of research, drive from bank to bank to scout out the best rates or compare their personal portfolio to that of the association without realizing that financial institutions treat consumer accounts differently than business accounts. This can also lead to lower returns on investments because board members may not have the experience or extensive portfolio to leverage more competitive rates."
   
   Karla Chung, vice president of FirstService Financial

3. Learn the fundamentals of HOA investment.

   While boards should avoid taking on the role of an investment manager, it’s important to have a working knowledge of your association’s financial management. This includes your fiduciary duties and the options available for reserve fund investments. Even if you partner with a financial services company, the board should be approving safe, proven vehicles such as money market accounts for accessible funds or CDs for longer-term needs. All investments must comply with Arizona HOA laws for managing and reviewing reserves.
    

4. Partner with an HOA-specific financial services company.

   Board members juggle a lot, and managing association funds for maximum benefit takes time, market knowledge, and the right relationships. That’s why many HOAs choose to work with a financial services company that specializes in community associations. The right partner will bring scale, established banking and insurance relationships, and an understanding of how financial returns can support your community’s long-term goals.
   
   A knowledgeable financial services provider can also help you select the right banking partner and account structure, balancing safety, liquidity, and return. This strategic approach can strengthen both your short-term operating position and your long-term capital planning. To learn more about building the right banking program for your HOA, visit FirstService Financial.
    

5. Review your HOA investments regularly.

   Checking your reserve fund investments should be part of the board’s routine financial review. Rates and terms can change, so schedule quarterly check-ins to confirm your investments still meet your needs. This is especially important if you’re not working with a management company that maintains strong banking relationships. If your HOA has an investment policy, review it annually with your management and financial services partners to determine whether any updates are needed based on current performance or regulatory changes.
   
   If your association has an HOA Investment Policy (see below), make it part of your annual review process. Work with your management company and financial services partner to confirm it still aligns with your financial position, so you can avoid making amendments just to address changes in your numbers.
    

6. Create an Investment Policy.

   Last but certainly not least, having an Investment Policy that outlives the current board is critical.

   "An Investment Policy guides and protects the association and board directors for years to come."
   
   Karla Chung, vice president of FirstService Financial

   She said, “You may currently have an experienced and responsible board who is doing their fiduciary duty, but due to board turnover that may not always be the case. An Investment Policy is critical in providing continuity of prudent investment decisions that safeguard the association’s assets.”
   
   An Investment Policy defines how and where an association should be investing its funds to maximize the yield and provide liquidity without compromising the safety of the funds. An HOA financial services company can help facilitate this process by walking you through each step and making recommendations to help you develop an effective plan for the future.

If your board is ready to review your reserve strategy or explore better ways to manage community funds, our team can connect you with resources and professionals who specialize in HOA finances. Thoughtful planning today can save your community time, stress, and money tomorrow. Contact FirstService Residential today.
 
Disclaimer: This article is provided for information purposes only and does not constitute legal advice.