What to do with house sale proceeds

[photoguy]

Today we closed escrow on our house, one of the last steps to extricating ourselves from the bay area. However, now we've got a big chunk of cash lying around doing nothing (roughly 250k additional) and our portfolio was already cash heavy.

So the question is what should we do with this money? Basically, if we decide to purchase a new residence we'd use this to pay for it (initially we're going to be traveling and spending a few months each in different locations to test the waters). But we may just decide to keep moving/renting as well and not buy at all.

My initial thoughts were to take 20% and invest in stocks (to stay ahead of inflation), another 20% for a short term corp bond (like VFSUX with yield=1.6% and duration 2.3 years) and the rest in Ally savings (0.87%) until I can find a decent CD rate. Unfortunately penfed no longer has it's 3% CDs and it's not clear when that rate would become available again.

Are there other things I could do with the money? What's the best CD I can get right now?

 

[SVHoper]

Hi,

I have struggled with this, but I have been definitely looking for a house for the best part of a year (made a couple of offers), so almost had to keep it cash-like.

For me the key would be whether, I would be OK in delaying purchasing a house if the market tanked. If so, I would be inclined to lump/dollar cost average into VTI and VB (or your current asset allocation)... if/when you made 20%? you could pull it out and be assured of being ahead of cash or bonds. I would do this knowing that there could easily be a 10% correction.

Clearly, it would not be wise if you needed to use the money within a year or even < 3? years. (some say 5? 7? years)

 

[MichaelB]

I'd say keep it in one or two bond funds until you know if you will be buying another house.

 

[jerome len]

Short term bonds would have my vote.....depending on you income level you might want to look at Vanguard short term muni bonds.

 

[W2R]

I would just keep it in a saving account and swallow the loss. Then you know for sure it will be accessible if/when you find the house of your dreams and need it right away.

But, that's just me... I don't always make the wisest decisions and if I was in your situation and LOST the house of my dreams due to an unexpected huge market crash I would be devastated.

 

[mpeirce]

So the question is what should we do with this money? Basically, if we decide to purchase a new residence we'd use this to pay for it (initially we're going to be traveling and spending a few months each in different locations to test the waters). But we may just decide to keep moving/renting as well and not buy at all.

If you might need the money in the next couple of years I'd simply park it. If after a year or two it turns out you don't need it, then you can move it into investments. Sure, find the best rates, but safety is the prime consideration here, not return.

Personally, I'd just park it in a bank (make sure you stay under the FDIC limits). Imagine a financial panic right before you need the money for another house. 2008 isn't the worse that can happen. Do you want to be in that position?

Money you need in the short term shouldn't be in the market.

FDIC: Deposit Insurance Summary

 

[photoguy]

Thanks for the advice. I'm still not entirely sure what we'll do with the money but maybe that's because ultimately it won't make that much of difference (with the options I'm considering).

 

[Mulligan]

I would just keep it in a saving account and swallow the loss. Then you know for sure it will be accessible if/when you find the house of your dreams and need it right away.

But, that's just me... I don't always make the wisest decisions and if I was in your situation and LOST the house of my dreams due to an unexpected huge market crash I would be devastated.

Maybe I am guilty from reading from investing books only written by you W2R, but I thought the "golden rule" so to speak was do like you mentioned for any money that will be needed in the next 5 years.

 

[brett]

We did, and still have the same issue. We sold eighteen months ago and have not bought.

So, we re balanced our portfolio and moved some monies that were previously in bond funds etc. to equities. This has worked out well for us-especially since we have increased our foreign exposure (our currency has dropped in value by about 10 percent over the past six months).

When and if we buy we will rebalance again.

Now that we are renting, we are taking a long, hard look at the buy vs. rent equation as it pertains to condos. Currently, it does not make financial sense to buy but this is offset by the fact that we have always owned. And we were brought up to believe owning your own home is what everyone needs to do.

Over the past eighteen months our money has worked much better for us in the market than would have in real estate. And our housing costs-heat, mtce, insurance, have been much less.

 

[W2R]

Maybe I am guilty from reading from investing books only written by you W2R, but I thought the "golden rule" so to speak was do like you mentioned for any money that will be needed in the next 5 years.

I haven't written any investing books so I guess your post is tongue in cheek? I know I have a high post count.

I do prefer to keep money in savings if I am going to need it soon. But, some people here prefer to invest such money in short term bonds. That goes SO against the grain for me.
_______________

I have more to say (imagine that? ) unrelated to that, but related to the original topic of real estate proceeds as well as taxation:

I have occasionally thought of moving to a more expensive home. I gather that if one has lived in one's house constantly right up until sale, and if the gain over the purchase price is less than $250K, then the money gained from the sale is not taxable by the IRS. That is SO cool. I gather that one does not even need to buy a second home right away to avoid taxation on that gain as long as it is less than $250K.

However, if the new home costs more than the old home, then to pay for it one may need to produce additional funds besides just the proceeds from the old home. One may get a mortgage but I refuse to ever do that again so my choices are self-limited. If one has to sell investments for this purpose, then any gain realized on the investments when sold is taxable. If one wishes to buy the new home before selling the old home, one must sell even MORE investments to do so and get taxed on even more investment proceeds. So, I gather that from a tax standpoint, it is smarter to sell the old home first instead of to buy the new home first.

All in all, moving to a more expensive home looks to me like such a headache from a taxation viewpoint. This is especially true if one does NOT want to consider a mortgage ever again for any reason, and if one is extremely picky about the new home and might have to wait 2-3 years before one's dream home even appears on the market. I don't relish living in a rental for that long. So, I would rather buy the dream home first and then sell my present home, but if I do that then I think I would get clobbered by taxes upon selling investments to pay for it.

 

[Mulligan]

I haven't written any investing books so I guess your post is tongue in cheek? I know I have a high post count.

I do prefer to keep money in savings if I am going to need it soon. But, some people here prefer to invest such money in short term bonds. That goes SO against the grain for me.
_______________

I have more to say (imagine that? ) unrelated to that, but related to the original topic of real estate proceeds as well as taxation:

I have occasionally thought of moving to a more expensive home. I gather that if one has lived in one's house constantly right up until sale, and if the gain over the purchase price is less than $250K, then the money gained from the sale is not taxable by the IRS. That is SO cool. I gather that one does not even need to buy a second home right away to avoid taxation on that gain as long as it is less than $250K.

However, if the new home costs more than the old home, then to pay for it one may need to produce additional funds besides just the proceeds from the old home. If one has to sell investments for this purpose, then any gain realized on the investments when sold is taxable. If one wishes to buy the new home before selling the old home, one must sell even MORE investments to do so and get taxed on even more investment proceeds. So, I gather that from a tax standpoint, it is smarter to sell the old home first instead of to buy the new home first.

All in all, moving to a more expensive home looks to me like such a headache from a taxation viewpoint.

Yes, totally tongue in cheek, but in total agreement with you. In addition, I suffer from loss aversion. If I had a designated amount of money needed possibly for a home, a 10% gain in the market would bring me less satisfaction than a 5% loss would cause in anger.

 

[W2R]

Yes, totally tongue in cheek, but in total agreement with you. In addition, I suffer from loss aversion. If I had a designated amount of money needed possibly for a home, a 10% gain in the market would bring me less satisfaction than a 5% loss would cause in anger.

+1000 !! I would just be devastated if I had to sell low in order to buy my dream home.

 

[photoguy]

I have occasionally thought of moving to a more expensive home. I gather that if one has lived in one's house constantly right up until sale, and if the gain over the purchase price is less than $250K, then the money gained from the sale is not taxable by the IRS. That is SO cool. I gather that one does not even need to buy a second home right away to avoid taxation on that gain as long as it is less than $250K.

This is a really nice benefit (and it's 500k for a couple). No need to worry about doing a like-kind exchange. But overall I don't think we really made much if anything by owning for the past ten years once all expenses are factored in.

However, if the new home costs more than the old home, then to pay for it one may need to produce additional funds besides just the proceeds from the old home. One may get a mortgage but I refuse to ever do that again so my choices are self-limited.

I actually wouldn't mind getting a mortgage but I don't think we'll qualify for one with no steady paycheck. I know some members have obtained one based on steady withdrawals from retirement accounts but I don't want to rely on that.

Now that we are renting, we are taking a long, hard look at the buy vs. rent equation as it pertains to condos. Currently, it does not make financial sense to buy but this is offset by the fact that we have always owned. And we were brought up to believe owning your own home is what everyone needs to do.

When we first bought our home, we didn't really know what we were doing and I'm glad we were able to get out without losing a ton of money. If we decide to buy, we'll definitely approach the buy vs rent much more quantitatively.

 

[Hermit]

I would just keep it in a saving account and swallow the loss. Then you know for sure it will be accessible if/when you find the house of your dreams and need it right away.

But, that's just me... I don't always make the wisest decisions and if I was in your situation and LOST the house of my dreams due to an unexpected huge market crash I would be devastated.

Yep. Sold the house in June 2012. Still sitting on the cash (300k) in the bank. I'll be building a house this summer.

 

[brett]

We are very happy that we did not sell, and then buy immediately. Two events have had a significant impact on what we will do.

The first was retirement. It changed out outlook. Downsizing to a storage container felt really good. It was a lot of work but for us it was like dusting off the cobwebs and starting again. We simply had too much stuff that we did not need. The second was travel. We lived in smaller spaces and different kinds of spaces for an extended period of time. We got used to having less space, or should I say less wasted space.

These two, plus the passage of time really altered our thinking. We have been renting a 2 br. condo for nine months now. We love it. We can clean it in an hour or two....vastly different from the three level, four bathroom mausoleum that we used to own. Renting has also impacted our outlook in terms of the financial objectivity of the buy vs rent equation. We are starting to look at buying again....but like any other investment this must pass certain hurdle rates. Otherwise we will simply rent, invest the capital, and bank the expense savings. Either way, we will continue to travel.