HOA Inflation Is Here
There’s no denying it, inflation is here. Economists have been talking about it for a while now and the fact is it’s something we’re all going to have to learn how to work with. So what does that mean for your HOA? Well, it can mean a number of things from how it impacts your HOA, figuring out what your HOA can do, to compound benefits of inflation. Additionally, it can affect your budgeting as the cost of products and services are at an all-time high. To put that into perspective, they are the highest they have been in 40 years and show no signs of slowing down either. Read on to learn more about your HOA and inflation.
How Inflation Impacts Your HOA
Typically, unit owners within an HOA are likely pleased with the increase in the value of their homes. However, a high level of inflation is likely to have a potentially negative effect on the long-term financial health of the HOA.
At a professional level, expenses are going up for most HOAs. Landscaping costs are increasing as fuel prices rise and labor markets tighten. Property management, maintenance, and repair costs are also adjusting to reflect rising material prices and labor shortages. Along with utility bills getting more expensive due to the tracking of higher energy prices.
The board may find that their HOA is under-funded for a project budgeted many years ago. They only had around $1.2 million in reserves for the project and now face a $4 million shortage. This means current unit owners are taking the brunt of poor planning and higher costs.
What Can Your HOA Do?
Your HOA board should be planning ahead for large capital projects as costs begin to increase. With the addition of labor and energy cost increases, the issues with the supply chain continue to impact raw materials.
If your HOA board does not revisit outdated reserve studies, it is crucial to do so in light of current inflation rates. HOA Loans could be a very strategic approach for other tools to consider.
In light of the current inflation rates, HOA boards would be wise to revisit outdated reserve studies (if they don’t already do so periodically). A more strategic approach is for the board to consider other tools such as HOA loans.
For example, assume that an association anticipates a large capital project that will begin in a few years. Let’s say the cost of the project in today’s dollars is $10 million. If construction-related expenses increase annually by 10%, the same project will cost over $16 million in five years.
In this instance, an HOA loan makes perfect sense. Assuming that the HOA finances are healthy, the board can enter into a loan with a relatively low-interest rate. They can use the proceeds to complete the project today rather than wait five years.
If this project is completed promptly, the board can avoid future cost uncertainty. Loan-related interest payments for this project will then be considerably less than $6 million. The association would also eliminate the risks associated with future funding. If this HOA were to need a loan in five years, the interest rate environment would also be considerably less attractive.
Potential buyers would also be likely to discount the pricing uncertainty when a future project is necessary but left undone. Potential buyers are fearful of cost and financing uncertainty, not to mention general disrepair. Typically, home values are more likely to increase after a project has ended and when buyers can see community improvements.
Although inflation is rampant and prices are rising, the cost of debt has remained very low. Today’s Goldilocks scenario has created the perfect opportunity for HOA boards to think strategically about using debt to tackle large impeding capital projects. Perfect opportunities like this are not likely to remain available for too long. If your community is facing an imminent large capital project, let us help you strategize and model your loan options.
With inflation, HOA costs are rising as well, as we’ve discussed, due to labor and supply costs rising. But not all is bad news as financing is becoming cheaper! In many cases, the costs end up being a wash as we have a “Goldilocks” scenario. Classic Construction has a fantastic finance partner and we also have the ability to work on different maintenance plans for your HOA. Call us to schedule a meeting to talk about your HOA maintenance plan today!