Investing after a home sale. Where to put the proceeds?

[Doc Holliday]

There are many variables that are personal to your unique situation. (Don't want you to answer these, just giving some examples):

What is your net worth?
What is your annual household income vs. annual expenses?
Do you have other sources of income (trust, pension, investment income, etc.) that are independent of a job? (if so, how much relative to your expenses)
What other liquid assets do you have to tap into should you have an emergency come up?
Do you or your wife have certain desires for the new house (new kitchen, pool, etc.) that may need to be addressed or is it turn key?
How new are the roof, HVAC, windows, etc. on the new house? If your HVAC system crapped out tomorrow would you be able to replace it without taking on any debt?
What other expected expenses/purchases/trips/dreams do you have for the next 5-10 yrs? I recall a post you had about buying land, so that is one example that could fall into that category.

You obviously have strong cash flow relative to the loan you are taking out if you are able to pay off the new house in 6-7 yrs, but then you also talk about not being able to get to it if you need it, so those are somewhat conflicting. Much more info is needed, that would be unique to your individual situation. What is "enough" money, cushion, net worth, etc. to one person might not be "enough" to someone else. Only you know where the possible chinks in your armor are, and what your goals and dreams are.

You are wise to consider your options and to get other perspectives, so that tells me whatever you decide will be the right move for you and your family. I may be at a similar crossroad soon, as we are considering selling our current house and upgrading as well. These are truly first world problems. Good luck!

 

[sasquatch]

Do you have a CFP? Do you have a CPA? Having a conversation with both would give you a much better idea of what to do with the money.

If I were in your shoes, I'd look for a way to minimize how much I'm paying Uncle Sam in taxes.

If the house your selling was your primary home for at least 2 of the years you owned it. There is no tax due on the sale of it


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[sasquatch]

I think if you invest in a new house you don’t pay taxes. Otherwise, it’s taxed.

Not if the house sold was your primary home for 2 years!




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[Marble]

This is what's available after all our other debt is paid off. The house and utilities would be our only bills at that point.

If it were me I would put as much into the house as I possibly could. Sounds like you are in a great position financially and make good choices..

Any debt you have will slow down the building of wealth. The less debt you have the more you can invest. Living debt free gives someone freedom and a large amount of choices in life financially and with other future plans.

 

[Marble]

I know that's good advice. To be honest, we've lived so modestly for so long to get to this point that we've never had any need for a CFP or CPA, but I do have access to one. That's the next step but I know there are plenty here with lots of experience too, so I saw no harm in asking.

It is a good thought to minimize taxes, but owning a home with a monthly payment and property taxes saves you money on the amount of taxes you pay, but not overall. If you pay 5k in property taxes and 12k in interest every year, you get to apply those to your taxes and then pay reduced tax. You get a percentage of what you pay back, its not a total write off where the entire sum of each is applied back to your taxes, meaning your taxes are not 17k less. Its a percentage of it. But as soon as the house is paid off, you will not be paying any interest at all, effectively reducing your money going out by whatever the interest is on your loan. Property tax remains constant where I live, and generally does throughout the country. So whatever your interest payment is, minus your tax rate, is what you will save by maintaining a mortgage.

 

[Newtosavage]

There are many variables that are personal to your unique situation. (Don't want you to answer these, just giving some examples):

What is your net worth?
What is your annual household income vs. annual expenses?
Do you have other sources of income (trust, pension, investment income, etc.) that are independent of a job? (if so, how much relative to your expenses)
What other liquid assets do you have to tap into should you have an emergency come up?
Do you or your wife have certain desires for the new house (new kitchen, pool, etc.) that may need to be addressed or is it turn key?
How new are the roof, HVAC, windows, etc. on the new house? If your HVAC system crapped out tomorrow would you be able to replace it without taking on any debt?
What other expected expenses/purchases/trips/dreams do you have for the next 5-10 yrs? I recall a post you had about buying land, so that is one example that could fall into that category.

You obviously have strong cash flow relative to the loan you are taking out if you are able to pay off the new house in 6-7 yrs, but then you also talk about not being able to get to it if you need it, so those are somewhat conflicting. Much more info is needed, that would be unique to your individual situation. What is "enough" money, cushion, net worth, etc. to one person might not be "enough" to someone else. Only you know where the possible chinks in your armor are, and what your goals and dreams are.

You are wise to consider your options and to get other perspectives, so that tells me whatever you decide will be the right move for you and your family. I may be at a similar crossroad soon, as we are considering selling our current house and upgrading as well. These are truly first world problems. Good luck!

Yup, I've managed to live the American dream and dig myself out of poverty to get to this point. In 1986 I owned a Datsun pickup that I bought with the money I earned working in a sandwich shop. I would ride my bike to work every day until I bought that little truck. A year later I started college and worked my way through, taking only as many classes at a time as I could afford, and had time to attend when I wasn't working. But somehow I made it through. In those days, a person could still work their way through college. I don't believe that's possible today.

It feels pretty good, but I also recognize that although I grew up poor and earned every penny I have, I had many advantages that a lot of folks don't have. So that keeps me and my wife very humble and we will continue to live very modestly. We often talk about how happy we were when we were both poor,broke college students. LOL

I was asking about buying land because that is one option for us right now. But then I thought I should broaden the question a bit since I want feedback on other options from folks who have been in this position. I really appreciate the feedback so far.

 

[Choog]

I had the same scenario a few years back and put it all in my new house. I've had a change in mindset over the last few years and if I had it to do all over again I'd still put a portion in the new house to make payments lower but i'd put a large portion into an investment property to generate passive income.

I don't know a lot about it but i know it exists. A 1031 tax exchange i believe will allow you to take those proceeds from your house sale and put them toward an investment property without paying taxes on it. Please check with a CPA on that though.

I find that i struggle getting spare time to hunt or anything else. So my focus now is to generate passive income so I can retire earlier (hopefully) and have as much free time as I want.

 

[zion zig zag]

It is a good thought to minimize taxes, but owning a home with a monthly payment and property taxes saves you money on the amount of taxes you pay, but not overall. If you pay 5k in property taxes and 12k in interest every year, you get to apply those to your taxes and then pay reduced tax. You get a percentage of what you pay back, its not a total write off where the entire sum of each is applied back to your taxes, meaning your taxes are not 17k less. Its a percentage of it. But as soon as the house is paid off, you will not be paying any interest at all, effectively reducing your money going out by whatever the interest is on your loan. Property tax remains constant where I live, and generally does throughout the country. So whatever your interest payment is, minus your tax rate, is what you will save by maintaining a mortgage.

You'd have to have a lot of interest and property tax in order to beat the standard deduction and itemize after 2017 tax law changes.

 

[Racethesunset]

Either pay down the next house, put it in VTI (index fund), or buy gold.

The fed’s money printer will punish you if you hold the cash.

 

[Kilboars]

I’d getting it working for you either the stock market or get into some Hard Money Lending


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[Wallace]

You can roll your gain into a new house via a 1031 exchange within 180 days and defer paying taxes on that gain until the next house is sold (or just do a 1031 exchange again).

It sounds like he's already sold the house, you can't retroactively put those funds into a 1031 exchange, it has to be done before closing through a QI.


Me personally, I'd probably take that $100k, I'd invest in one or two multi family properties that cash flow well, put some in the stock market, put remainder in an account for a rainy day (if I didn't already have one with cash in it yet). With that said, I'm no where close to retirement age, and I enjoy real estate.

 

[Newtosavage]

It sounds like he's already sold the house, you can't retroactively put those funds into a 1031 exchange, it has to be done before closing through a QI.


Me personally, I'd probably take that $100k, I'd invest in one or two multi family properties that cash flow well, put some in the stock market, put remainder in an account for a rainy day (if I didn't already have one with cash in it yet). With that said, I'm no where close to retirement age, and I enjoy real estate.

Yup, house is sold.

Under no circumstances do I want to be a landlord. However my former neighbor has a couple rental properties and he enjoys it. Not for me though.

Most likely I'll put some in a rainy day fund I can get to in a real emergency, but not easily, and the rest into the new house.

What would a good example of a rainy day fund be? Something I can get to, but not too easily. I don't want to be tempted to raid it for frivolous purposes.

 

[TreeWalking]

Yup, house is sold.

Under no circumstances do I want to be a landlord. However my former neighbor has a couple rental properties and he enjoys it. Not for me though.

Most likely I'll put some in a rainy day fund I can get to in a real emergency, but not easily, and the rest into the new house.

What would a good example of a rainy day fund be? Something I can get to, but not too easily. I don't want to be tempted to raid it for frivolous purposes.

The rule with investing is to match the likely time horizon when will need with the investment type. Within the investment type, match to the risk level you can stomach.

Example of the time horizon is you should not invest in stocks if you need the money in less than 7 years then you are taking on risk of needing to withdraw before the stocks attain the expected return since stocks can be volatile in the short term. Bonds tend to be less volatile but still could see a drop in value that would not recover before you need to use the funds.

Example of risk within an investment type is blue chip stocks tend to be less volatile than young tech stocks. Federal bonds tend to be less volatile than junk bonds.

If this is a fund you expect will need to tap in the next two years then would suggest you leave in a savings account. You will basically lose money due to inflation outrunning your interest return but will be a small erosion.

If you do not expect will tap in the next two years then a bond fund such as BND is a consideration. If do not expect to tap in the next 5 years then could look at a broad market stock fund such as VTI.

All investments can fall in value and inflation can erode the true value of the investment even if grows in value. Inflation has not been a big issue in recent years but the future may well see inflation ramp up. Real estate is going to get popular for long term investing.

 

[efnm]

Yup, house is sold.

Under no circumstances do I want to be a landlord. However my former neighbor has a couple rental properties and he enjoys it. Not for me though.

Most likely I'll put some in a rainy day fund I can get to in a real emergency, but not easily, and the rest into the new house.

What would a good example of a rainy day fund be? Something I can get to, but not too easily. I don't want to be tempted to raid it for frivolous purposes.

Split that $100k and put half in an index fund (like VTI mentioned above) and half in a high-yield savings account (I use CIT bank (not Citibank). Adjust that split depending on when you think you might need to access it. Break up the index fund buys a few weeks or months apart if you fear buying at the wrong time (this is dollar cost averaging).

 

[rtaylor]

I'm taking the guaranteed 2.75% and putting a good chunk towards my house. That is after I have consumer debt paid and a rainy day fund. Nothing wrong with investing in the market but as of today the market is at an almost all time high.

 

[Newtosavage]

I'm taking the guaranteed 2.75% and putting a good chunk towards my house. That is after I have consumer debt paid and a rainy day fund. Nothing wrong with investing in the market but as of today the market is at an almost all time high.

I've had that same thought. 2.75% ain't much, but it is something. Can I get that from another investment that I can get to in an emergency?

 

[rtaylor]

I've had that same thought. 2.75% ain't much, but it is something. Can I get that from another investment that I can get to in an emergency?

Nope, anything secure is looking at 1-2% if you can find a local bank running a special on a 5 year CD. 2.75% isn't great but you know where it is going and what your return is. It gets you closer to being debt free where you can really put a bunch towards retirement. My local bank will do a HELOC for a $50 fee and I have access to my equity. Could they call it? Yes (not likely) but that's not a risk if I've already got 6 months of savings put back. Lots of people will suggest different stocks but if you're not a day trader by profession then don't dabble with anything other than surplus fun money because every stock is a gamble.

 

[rayporter]

everybody is different. when i had the chance i paid off the house.

man what a feeling.

 

[Akwoodchuck]

Antarctica...guided penguin hunt...cause why not....

 

[Farmingdale's Finest]

Right, that's how I usually look at things but the interest rate on the new loan is so low that I wanted to ask about options I may be missing. Also, tying up cash in a house vs. having it available if needed is a consideration. Just wanting to look around before I leap.

You need to look at what the loan lending rate is and if you determine that you can make enough on the free cash to justify carrying the debt then it makes sense. It’s called an interest rate arbitrage. For instance a 30 year mortgage is roughly 3% which is insanely low when you look at the historical average being about 9%.

So let’s say you have a mortgage of 3% and feel you can make 6% if you are in the highest interest rate you will clear about 1% when you figure in taxes. So that really means to make it worth it in this scenario you need to gross 7% or more to make it worthwhile.


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