What Should be Included in the HOA Budget?
Thoughtfully planning and preparing for the annual HOA budget is not easy, but it is crucial to the day-to-day and long-term success of the community. Each year, the board is tasked with overseeing both the operating and reserve budgets and adjusting them accordingly to best meet the needs of the association.
Operating vs. Reserve Budgets
HOAs should have both an operating and reserve budget. While the operating budget pays for everyday services including lawn care, utilities, and office expenses, the reserve budget exists to cover unexpected or infrequent projects such as roof replacement, new construction, or road repair. The board should conduct occasional reserve studies as a planning tool as they consider and prepare for the future of the HOA.
What to Include in the Operating Budget
Failing to fiscally prepare for the upcoming year can create unnecessary and potentially serious problems for the association. A solid annual review will eliminate the need to constantly adjust the budget throughout the year and should always include these most common HOA expenses:
- Setting aside sufficient funds for regular lawn care and landscaping services, pool upkeep, and other standard maintenance is critical to upholding an association’s reputation and sustaining member satisfaction.
- Insurance/Taxes. Not only should the board include the association’s annual insurance premiums in their budget review, it’s also important to consider how they will cover their deductible in the event that disaster strikes and they need to make an unexpected claim. Increases in annual taxes and common area improvements and upkeep should also always be considered in budget planning.
- Administrative Costs. Operating budgets should include the cost of services that are employed to help successfully run the association, including association management, legal or financial professionals, and maintenance contractors.
- While some types of expenses are predictable, the amount needed each year may not always be the same. Because the cost of power, water, gas, and other utilities is constantly changing, it’s a good idea to plan for up to a 5% increase annually.
- Vendor Services. Because HOAs generally use many service providers, it’s always a good idea to review vendor contracts and adjust the budget for any cost increases. This is also a good time for the board to consider negotiating rates and requesting updated insurance information from each current vendor.
With the financial security of the association in their hands, boards can be easily overwhelmed when tasked with the annual budget review. Determining the needs and wants of the association and prioritizing projects accordingly is critical to streamlining the process and making the very best decisions for the community. For more helpful information on HOA management be sure to visit our blog for monthly updates.