When we start working with a new association, the first thing we do is a full financial review and budgeting. More often than not, we find associations do not have enough cash in the bank to be financially healthy, and are often depending on frequent assessments to make ends meet. Even more common, they barely take in enough money to actually be solvent. We have a few tips on how to actually add some stability to your condo financial planning, and greater value to the unit you own.
How much operating cash should we have on hand?
Your operating cash balance will fluctuate from month to month. In general, we recommend having a regular operating cash balance of at least 3-4 month worth of your annual budget at all times, (5-6 months if you collect quarterly or less frequently). This way if anyone is ever short, or you have larger expenses that come up on more irregular payment schedules, like insurance, you will have the money to cover them.
How should we plan our reserves?
Reserves are meant to be used for long term maintenance of the property. Generally we recommend adding at least 10% of your annual budget to your reserves in a given year. Sometimes, if you know you have a larger project coming up in the near future, you might start dedicating more earlier on. Maintaining a regular reserve balance of about 50% of your annual budget is ideal. This way you have cash on hand in case a smaller item comes up and adding more predictability to each member’s payments in a year.
How much should we be charging for fees?
Your regular fees should at a minimum be covering the cost of all the regular costs the association will incur in a 12 month period, plus contributing some toward the association reserves. This usually includes things like utilities, insurance, maintenance services (landscaping/snow/cleaning, etc), pest control, alarms, trash pickup condo manager, and more. We have seen some associations try to use special assessments to make their regular fees look lower than they actually, which is incorrect, and frankly a semi-dishonest practice in operations.
If I might not live here long term, why should I pay upfront for future maintenance?
This is often the counter argument we here from folks regarding why they do not want to contribute to developing strong reserves. The reason is it makes your condo association stronger, and even more appealing to future buyers. In fact, when we broker units, we highlight the fact that an association is strong and has strong reserves as well as a sound capital improvement plan. More often than not, you get that money back in terms of a higher purchase price, and/or faster sale of your unit. Everyone wants to buy quality, so the higher quality you can show you have, the better position you will be in terms of distinguishing yourself from other units on the market.
Even keeping these few guidelines in mind as you operate your condo association will help things run more smoothly.
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