HOA reserves “rules of thumb:” Key strategies for success

As a board member, one of your top responsibilities is to maintain and improve your community’s physical property. But it can be tricky to budget for new amenities like a dog park or gate houses, or to plan for replacing or upgrading shared, common-area assets such as roofing or building facades. The good news is an experienced property management company like FirstService Residential knows how to put effective reserve funding strategies in place. By partnering with experts, your board can properly plan for these eventualities and avoid, as much as possible, having to impose special assessments.
 

What are HOA reserves?

A reserve fund is a community savings account that serves as a cushion — protecting your association’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding that comes from a percentage of your association’s dues.

A reserve study assists with an association’s long-term financial planning by taking into consideration the current status of the reserve fund and determining a regular funding contribution that will offset ongoing wear and tear and/or achieve future community enhancements. The reserve study is comprised of two parts — a comprehensive physical analysis of the current condition of your community’s assets, and a detailed financial analysis.

Both the reserve fund and reserve study are critical components of the budgeting process that help ensure the long-term financial security of your community.
 

HOA reserves rules of thumb

Maintaining healthy reserves is essential for an HOA’s long-term financial stability. The following tips and action items can guide boards in building and managing strong reserve funds:

• Follow the 70% Rule: Aim to keep reserves funded at 70% or more of the recommended reserve study target. This level may help maintain the financial capacity to cover future repairs and replacements without relying heavily on special assessments.
   
• Conduct regular reserve studies: Schedule a professional reserve study every three to five years to accurately assess upcoming expenses and adjust funding goals as property needs evolve.
   
• Contribute consistently: Allocate a portion of assessments to reserves with every budget cycle. Even modest, regular contributions are more effective than infrequent, larger deposits.
   
• Review and adjust annually: Assess reserve funding as part of your annual budgeting process. Adjust contribution amounts as repair costs, inflation, and capital project timelines change.
   
• Monitor investment strategies: Keep reserve funds in safe, interest-bearing accounts that comply with governing documents and local laws. Avoid high-risk investments.
   
• Communicate with homeowners: Keep members informed about the status of reserves, major repairs, and funding plans. Transparency helps build trust and understanding among residents.
   
• Plan proactively for major expenses: Use reserve studies to anticipate and save for large projects like roof replacement, painting, or paving rather than responding reactively to emergencies.

By following these practical steps, boards can help safeguard their community’s assets, maintain property values, and reduce the risk of unexpected special assessments.

Important: A “Rule of Thumb” is intended to be generally applicable and is not intended to be strictly accurate or reliable in every single situation.  It is a benchmark, not a strict requirement. Each Rule of Thumb is a generally accepted practice used by the HOA industry which may offer a well-grounded safety net and help reduce the risk of ending up with underfunded reserves.

The laws that govern reserves are different from state to state and may change rapidly as legislatures respond to changing market conditions. This article is not meant to be legal advice of any kind on how to fund and maintain your reserves. If you have questions about your community’s reserves, check with your professional property management partner and your legal counsel. 
 

Benefits of proper reserve funding

The key to protecting the fiscal health of your community is committing to the consistent funding of your reserve fund over time. By doing so, your community will realize three distinct benefits:

1. Peace of mind - A reserve fund gives homeowners greater confidence and comfort in knowing money will be there when it is needed.
    
2. Market value preservation – When reserves exist to support shared assets in a community, the market value of properties within that community is better maintained.
    
3. Equitable cost participation – One of the main advantages of establishing and maintaining a reserve fund is that it allows all residents who are using and enjoying community assets to contribute to their costs. Without reserves, a special assessment may be necessary, impacting only those residents who are living in your community at the time an asset needs to be replaced. By funding reserves over time, generations of owners can share in the costs of assets.

Your governing documents will detail if a reserve fund must be established for your community. In fact, some states require fully funded reserves. These documents will also outline what procedures must be followed for contributing to your reserves. It can also help you decide if funding can be postponed or sidestepped all together if the majority of your residents agree to it. A good property management company will offer sound guidance on establishing and maintaining funding of your reserves. At FirstService Residential, it is an essential component of the support we offer communities for successful, long-term financial planning.
 

The importance of a reserve study to your reserve funding strategy

It can be challenging for a board to identify all the items in its community that will eventually need the support of reserve funds, when those items will need to be developed, upgraded or replaced, and how much it will cost in the future. That’s where the reserve study comes in.

By assessing the condition of common-area assets within your community (like club houses, lobbies, and pool areas), identifying future replacement costs, and recommending an annual contribution amount for the reserve fund, the study can better position your board for long-term financial success.

At FirstService Residential, we highly recommend that you enlist the services of a third-party professional such as a reserve specialist to conduct your reserve study. These professionals will have a thorough understanding of all the assets in your community, their typical lifespan and replacement cost, and if/when they should be added to your reserve inventory.

They will also have intimate knowledge of your state’s requirements regarding reserve funds and studies. And most importantly, they will offer your board an unbiased and sometimes much needed voice to your budgeting process. Please reach out to FirstService Residential if you need help identifying a reserve specialist in your area. Our North American footprint is such that we can make these recommendations for communities of all sizes and types.

It is also important to treat your reserve study as a living, breathing document that should be regularly reviewed and updated. But remember, it’s a guide. You don’t have to hold fast to the recommended timeframes.

It’s also strongly recommended to regularly update your reserve study. For newer communities, the suggested interval is every three years. After a decade of existence, communities should consider updates every other year, and detailed reviews of the study should occur annually. Again, your state may dictate the schedule you must follow for reserve studies/updates. A good property management company will be able to provide this information to you.
 

Determining maintenance vs. reserve components

Properly categorizing your community’s common area components is one of the challenges that comes with managing reserves. Some items will require regular maintenance such as pressure washing sidewalks and window cleaning, others will need to be replaced like roofs and mechanical equipment, and still others will require both such as pools and carpeting.

To help your community components last until their scheduled replacement, it's important to budget for maintenance costs each year. Without this allocation, you might have to replace components sooner than anticipated in the reserve study, which could result in imposing a special assessment or taking out a loan.

At the same time, you must make a reserve contribution each year to be properly prepared for covering replacement costs when they are scheduled to occur.

Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve inventory. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer time period. If you need help determining whether an item should be included in your operating budget or reserve inventory, consult with your auditor or property management company.

More and more communities, especially those that are decades old, are starting to address infrastructure components as part of their budget planning process as well. These are components that last a very long time, are generally out-of-sight and as such, are not often thought of — like sewers or risers. A good practice to follow is to add infrastructure items to your reserve components list when they reach the halfway mark of their expected life spans.

As your board takes on the responsibility of budgeting for your community, be sure to rely on your reserve fund and reserve study. They are both indispensable tools that can help keep your community’s long-term financial plan in check.

Please note that in this article, we often mention HOAs, which are the most common residential community association structure across the US and Canada. And yet, these best practices should provide helpful guidance for other community types too, including condominiums, cooperatives, and strata corporations too.

The information contained in this article is for informational purposes only and should not be construed as legal advice on any subject matter. Prior to taking any action, please consult with your community’s legal counsel and property manager.