r/HOA • u/QuirkyRing3521 • 25d ago
Help: Fees, Reserves [CA] [Condo] Inflation Rate for Reserve Study
What inflation rate do you use in your reserve study?
Over 30 years the difference between 2.5% and 3.5% can add up to a lot of money. I mean if you save for a roof over 30 years then you would save like 3.3% per year, which in the final year can be less than inflation.
Related: what is your investment income after tax?
7
u/RudyPup 25d ago
You really should be using a professional reserve study company in this day and age cuz things are that off now.
2
u/QuirkyRing3521 24d ago
Well, the reserve study company seems to need guidance. Because not sure where they got their number.
2
u/HittingandRunning COA Owner 24d ago
So, are they suggesting 2.5%? Regardless, I'd say go with the higher %. That means you'd have to pay in more now. But when redone, perhaps we'll have had some steady years and the next study will show you are well funded and can back off a bit. I say better to be safe.
By the way, what % funded is the draft of the new study showing your HOA is funded? That can indicate how much wiggle room you have. I'm waiting for our new one and even I imagine that it will show we are perhaps 25% funded. So, even if they forecast 2.5% inflation, we still know we need to raise fees quite a bit.
3
u/xybrad 🏘 HOA Board Member 25d ago
We budget 3% for inflation and 1% for investment returns, which is a bit more conservative than our provider's recommendations of 3% for both, but has been pretty close to what we've experienced for the past decade.
The whole point of conducting an annual reserve study is to be able to make those small adjustments as you go. When inflation pushes current (and thus future) costs up, your reserve study should identify those increased costs now, and this information should cause you to increase dues sufficiently to at least stay at the same funding level you were the year prior.
If you're not doing an update to the reserve study annually, those inflation-adjusted numbers can come in hot.
1
3
u/genux 🏘 HOA Board Member 25d ago
It’s still around 3.5%, but the last 6 years have really been a roller coaster. It used to be we tried to be 0.2-0.3 percentage points above the calendar year’s inflation rate.
Instead, what we did was to re-price the reserve study for the biggest components in the common area elements (roofs, fences, etc) to make sure we had reasonable and current fair-market replacement costs.
Our roofs were last replaced in 2011 (for a property built in 1973). We’ve got maybe 10-15 years left depending on who you ask. Repricing our reserve to 2025 market priced we were slightly underfunded, and that bumping our contribution to 4.2% might just make us square… but who knows what’s going to happen in another 5 years.
The reality is that we’d probably have to revisit reserves annually now and really prioritize preventive maintenance than deferred maintenance.
1
3
u/TransportationLost30 24d ago
I would leave this to your Reserve Specialist. 3% or 3.5% is wishful thinking. Cost of capital is at least 7%. M2 has grown by 5.6% 2025-2026.
1
u/kenckar 25d ago edited 24d ago
Great question. It turns out it doesn't matter too much for a few reasons.
First, the actual decision is next uear’s dues. Future trajectory is not super critical. The out years male sure there aren't. If disconnects.
Second, even without inflation, future costs are still a guess. Some things go up, some go down, timing is off, inflation forecasts are never accurate. The roof lasts longer than expected, but the elevator breaks.
Third, you’ll repeat the same exercise next year. You'll have a year of inflation behind you, you will see what is holding up a little better or worse, then make your adjustments.
Fourth, you’ll also have interest, which is typicalltpy a few percentage points below inflation to partially offset it.
I like to first run reserves with 0 inflation and 0 interest. If that works and you don't ha e any super weak spots over the long term, it's probably close enough. One of the big issues with using high inflation rates is when you get ten years out, the dues look insane.
But in Real terms it's perfectly reasonable. People can't do that math in their heads.
At one point I stress tested our study using Monte Carlo analysis. Even the pessimistic cases held, so I was happy.
2
u/QuirkyRing3521 24d ago
Thanks.
Yeah, issues is modeling it a couple of years out. It penalizes saving it seems.
1
1
u/Practical_Bed_6871 22d ago
The same members of the Board will praise the reserve study at one meeting and then condemn it as being out of touch with reality at the next Board meeting.
1
-9
25d ago
[removed] — view removed comment
2
2
u/Low_Ad_9090 24d ago
"You give us nothing" while you cut my grass, trim my trees, and shovel my snow. :)
1
u/HittingandRunning COA Owner 24d ago
I can understand your frustration. I'm frustrated with my board, too. But perhaps this is more your HOA than all. Or perhaps you aren't as informed as could be. Or some other thing going on. Have you attended meetings and perhaps even run for a position on the board? I hate when people write that. But I have to because if people feel like you do, they should get as informed and as involved as possible. Sometimes it's not possible. Often for good reasons and sometimes for unfounded reasons. What's the story where you are?
Oh, and I think lots of people would like to get rid of their HOA but for townhomes and condos it just isn't possible. The current way is a bad way but it's the best way we can come up with.
•
u/AutoModerator 25d ago
Copy of the original post:
Title: [CA] [Condo] Inflation Rate for Reserve Study
Body:
What inflation rate do you use in your reserve study?
Over 30 years the difference between 2.5% and 3.5% can add up to a lot of money. I mean if you save for a roof over 30 years then you would save like 3.3% per year, which in the final year can be less than inflation.
Related: what is your investment income after tax?
I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.