HOA Budgeting 101: Building a Budget That Works
A practical guide to creating an effective HOA budget that covers operating expenses, builds adequate reserves, and keeps assessments fair.
A budget is more than a list of numbers. It's a plan for your community's financial health. A good budget ensures the association can pay its bills, maintain the property, and build reserves for future needs without imposing unfair burden on homeowners.
A bad budget leads to cash shortfalls, deferred maintenance, special assessments, and angry homeowners. The difference between the two often comes down to process and attention to detail.
This guide walks through the budgeting process step by step, from gathering information to presenting the final budget to members.
Understanding Budget Components
Every association budget has two main parts: operating expenses and reserve contributions. Understanding both is essential.
Operating Expenses:
These are ongoing costs to run the association day-to-day:
- Administrative: Management fees, insurance, legal, accounting, office supplies
- Utilities: Common area electricity, water, gas, internet
- Grounds: Landscaping, irrigation, snow removal, pest control
- Building: Cleaning, repairs, maintenance, security
- Amenities: Pool, fitness center, clubhouse operations
Reserve Contributions:
Reserves fund major repairs and replacements that occur periodically:
- Roofs (15-30 year lifespan)
- Paving and asphalt (15-25 years)
- Pool resurfacing (10-15 years)
- HVAC systems (15-20 years)
- Painting and siding (5-10 years)
The goal is to fund reserves gradually so money is available when major expenses occur, avoiding special assessments.
Step 1: Gather Information
Good budgets are built on good information. Before projecting next year, understand this year.
Financial data to review:
- Current year's actual income and expenses (year-to-date)
- Prior year's final actuals for comparison
- Current contract terms and upcoming renewals
- Outstanding receivables and collection status
- Reserve fund balance and recent study recommendations
Operational input needed:
- Vendor price increases (many contracts have annual escalators)
- Planned projects or improvements for next year
- Known issues that will require attention
- Committee wish lists and priorities
- Insurance renewal quotes
External factors:
- Utility rate changes
- Local labor market conditions (affects contractor pricing)
- Insurance market trends
- Inflation generally
Start budget preparation 2-3 months before your fiscal year ends. This provides time for careful analysis and member communication.
Step 2: Project Expenses
Project each expense category based on historical data and known changes.
For recurring expenses:
- Start with current year actuals as baseline
- Adjust for known increases (new contract rates, utility changes)
- Add inflation factor for categories without specific quotes (2-4% is common)
- Consider seasonality if you're projecting from partial-year data
For contract services:
- Use actual contract amounts when known
- For renewals, assume some increase unless you've negotiated otherwise
- Budget for the full service period, not just when payments are made
For variable expenses:
- Repairs and maintenance: budget based on historical average plus known issues
- Utilities: review rate changes and usage patterns
- Legal: budget a reasonable amount even if no current issues (they arise)
Common budgeting mistakes:
- Assuming this year's low spending will repeat (especially repairs)
- Forgetting about contracts that renew mid-year at higher rates
- Ignoring inflation on categories "because they haven't changed much"
- Not budgeting for contingencies or unexpected expenses
Step 3: Determine Reserve Funding
Reserve funding should be based on your reserve study, not arbitrary amounts.
If you have a current reserve study:
- Use the recommended annual contribution as your starting point
- Adjust if actual costs have differed significantly from projections
- Consider whether to catch up if you've underfunded in prior years
If you don't have a reserve study:
- Get one. It's the only way to know what you actually need.
- As a rough placeholder, 15-25% of operating budget is common for reserve contributions
- This is a temporary measure, not a substitute for proper planning
Reserve funding methods:
- Full funding: Maintaining 100% of recommended reserves (ideal but often impractical to achieve quickly)
- Threshold funding: Keeping reserves above a minimum level that avoids special assessments
- Baseline funding: Maintaining positive reserve balance without a specific target
Tennessee doesn't require specific reserve funding levels, but underfunding creates real risk for your community and can affect property values.
Step 4: Calculate Assessments
Once you know your total budget, calculate the assessments needed to fund it.
Basic calculation:
- Total Budget = Operating Expenses + Reserve Contribution
- Monthly Assessment = Total Budget ÷ Number of Units ÷ 12
Adjustments to consider:
- Other income sources (interest, fees, facility rentals) reduce assessment need
- Bad debt allowance for expected uncollectable assessments
- Different assessment rates for different unit types (if your documents allow)
When assessments need to increase:
- Communicate early and clearly about the reasons
- Compare the increase to inflation and local trends
- Show what happens if you don't increase (deferred maintenance, special assessments)
- Phase in large increases over multiple years if possible
One Middle Tennessee community we work with faced a 20% assessment increase after years of underfunding reserves. Instead of implementing it all at once, they phased it in at 7% per year for three years, with clear communication about the reserve study findings.
Step 5: Approval and Communication
How you present and approve the budget matters as much as the numbers themselves.
Board review and approval:
- Present a draft budget to the full board for discussion
- Allow time for questions and revisions
- Document the rationale for key decisions
- Vote on the final budget as a formal board action
Member communication:
- Check your documents for any member notification or approval requirements
- Provide a budget summary that explains key categories in plain language
- Highlight changes from the prior year and why
- Be available to answer questions
What to include in budget communications:
- New assessment amount and effective date
- Summary of major expense categories
- Reserve contribution and current funding status
- Any major projects or improvements planned
- Comparison to prior year
Transparency builds trust. Even if homeowners don't like assessment increases, they'll respect clear communication about why they're necessary.
Key Takeaways
- 1Every budget needs operating expenses and reserve contributions
- 2Base projections on historical data plus known changes, not wishful thinking
- 3Reserve funding should be based on a current reserve study
- 4Communicate assessment changes early with clear explanations
- 5Start budget preparation 2-3 months before fiscal year end
- 6Transparency about budget decisions builds homeowner trust
Frequently Asked Questions
- How much should an HOA keep in reserves?
- The ideal reserve level depends on your specific components and their conditions. A reserve study provides personalized recommendations. Generally, 70% funded or higher is considered adequate. Anything below 30% puts the community at significant risk of special assessments.
- Can HOA assessments increase without owner approval?
- Usually yes, up to limits in your governing documents. Most Declarations allow the board to set assessments as needed to fund the budget. Some limit annual increases without member vote (e.g., no more than 10% increase without membership approval). Check your specific documents.
- What if our budget comes in higher than homeowners can afford?
- This is a difficult situation with no easy answer. Options include phasing in increases over multiple years, finding cost savings in operations, deferring non-essential projects, or having honest conversations about the community's financial reality. Underfunding to keep assessments low creates bigger problems later.
- Should HOAs budget for a surplus or break-even?
- Most associations budget to break-even on operations, with any surplus going to reserves. Some intentionally budget a small operating surplus (2-5%) as a buffer for unexpected expenses. Large operating surpluses may require return to owners or transfer to reserves.
- How often should an HOA update its budget?
- Budgets are typically prepared annually before the fiscal year begins. However, boards should monitor actual vs. budget performance monthly and adjust spending if significant variances occur. Mid-year budget amendments are possible if circumstances change significantly.
- What's a contingency line item and should we have one?
- A contingency is a budget line for unexpected expenses that don't fit other categories. Many associations budget 3-5% of operating expenses as contingency. It provides flexibility without dipping into reserves for minor unexpected costs.
Disclaimer
This content is provided for general informational purposes only and does not constitute financial or accounting advice. Budget requirements may vary based on your governing documents. Consult with a CPA for specific accounting questions.