What to do with home sale proceeds??

[booztedgt]

I was a first time homebuyer 4 yrs ago, and now that my townhouse is under contract I'm about to be a first time homeseller. I moved out of town and am currently renting, and still have 10 months left on my lease. I should consider myself lucky I suppose, but I will be making money on this deal, and when it's all over I'll have a nice chunk of change that I have no idea what to do with. I plan on using it as a downpayment for the next house I buy....but since I just moved to the area (DC) and I think prices are still outrageous here, the housing market is still dropping, and I'm not sure how long I'll stay here....buying a house here may not be the best decision. So I can either tuck it away in a safe 5% Money market account, or maybe buy an investment rental property. The stock market seems too volatile right now, and I don't want to risk losing basically my nest egg. What do people usually do in these situations? I figure with an investment property for rental I still have access to my capital (via a home equity LOC or loan), I'm making money off the rental and any price appreciation in the property (or risk depreciation in this market), plus with the housing market in bad shape I'm thinking there will be plenty of renters (like myself). What do you all think?

[anonymous_saver]

Whatever you decide to do, do not buy a rental property. Like you said, "buying a house here may not be a best decision", plus that you are "not sure how long I'll stay here". In addition, there are many problems that come from being a landlord, plus, you wouldn't have money easily available if you did decide to buy a home. How much are your proceeds? I personally, see only one option for you. Put this money into a high interest savings account around 5% or so, perhaps you could even put a portion of it into higher interest CD's (depending on how much proceeds you are making).

Also, are you completely out of debt? Are you saving for retirement? Do you have an emergency fund?

Look forward to hearing from you!

[jIM_Ohio]

Originally Posted by booztedgt

I was a first time homebuyer 4 yrs ago, and now that my townhouse is under contract I'm about to be a first time homeseller. I moved out of town and am currently renting, and still have 10 months left on my lease. I should consider myself lucky I suppose, but I will be making money on this deal, and when it's all over I'll have a nice chunk of change that I have no idea what to do with. I plan on using it as a downpayment for the next house I buy....but since I just moved to the area (DC) and I think prices are still outrageous here, the housing market is still dropping, and I'm not sure how long I'll stay here....buying a house here may not be the best decision. So I can either tuck it away in a safe 5% Money market account, or maybe buy an investment rental property. The stock market seems too volatile right now, and I don't want to risk losing basically my nest egg. What do people usually do in these situations? I figure with an investment property for rental I still have access to my capital (via a home equity LOC or loan), I'm making money off the rental and any price appreciation in the property (or risk depreciation in this market), plus with the housing market in bad shape I'm thinking there will be plenty of renters (like myself). What do you all think?

for every year the money will sit, consider putting 10% of in in equities. Put the rest in intermediate term bonds.

So if you could see yourself buying in less than 12 months, keeping it all in bonds or money markets makes sense.

If you could see yourself not buying for 7 years, then a 70% equity-30% bond position makes sense. If you do this, each year sell 10% to bonds (so 6 years out is 60%, 5 years 50%, 4 years 40%... the last year would be 10% equites and 90% bonds, for example).

[booztedgt]

I am completely debt free...I'm 29, have about 3 mon of income in savings accounts, and already put in 15% of my paycheck into a 401K (plus $4K for a roth IRA). I've never dabbled into bonds at all; do they pay more than the 4.5%-5% I'm getting out of money market accounts? I'd like to own a home again within the next couple of years...just depends on whether or not I stay in DC. Thanks for all the advice!

[Ima saver]

Do not buy a rental. I had 3 and it was the worst decision I ever made. They all needed repairs after the renters moved out and I sold them all at a big loss. I would put the money into a money market or c.d. paying 5% interest and use it for a down payment on a house later.

[jIM_Ohio]

Originally Posted by booztedgt

I am completely debt free...I'm 29, have about 3 mon of income in savings accounts, and already put in 15% of my paycheck into a 401K (plus $4K for a roth IRA). I've never dabbled into bonds at all; do they pay more than the 4.5%-5% I'm getting out of money market accounts? I'd like to own a home again within the next couple of years...just depends on whether or not I stay in DC. Thanks for all the advice!

Bonds have two risks

1) interest rate risks (yield)
2) principal risks

As interest rates rise, the principal goes down and the yield goes up.
As rates fall (the current environment), principal goes UP and yield goes down.

What I would look for is the total return (yield+principal changes) to exceed 6%. Intermediate term or short term bonds funds would be best.

My favorate bond fund is T Rowe Spectrum Income RPSIX. It holds 20% stocks and 80% cash and bonds. This is a fund of funds (it holds other mutual funds)

The equity position is in PRFDX, which is dividend paying stocks
The bond position holds high yield, government, corporate, foreign government, emerging markets and real estate bonds. It's long term return is between 6 and 8% depending on 5 or 10 year periods you evaluate.

The risks described above are also compounded by
1) currency risk (you get this with any international investment)
2) equity risk/market risk (fund is 20% equities)

For these risks, an 8% return in bonds is quite good overall. I would be hard pressed to find a single bond fund which has an 8% return over a 5 or 10 year period. If you go with a single bond fund, you will eliminate some of the risks mentioned here, and probably lower return by 1-3% over 5 year periods.

Rates change quite a bit in 5-10 years. 8 years ago I bought a house and rate was 8.125%. 2 years ago I bought a house and rate was 6.125%. Rates are now 5.875% I think on similar mortgage products. I mention this so you know even in short and medium time frames rates change often (they have gone up, they have gone down, then gone back up, then gone back down in 8 years).

And money markets have not historically had 5% yields. So the 3-4.5% yields of money markets now are more normal with risks being taken. Money markets only have interest rate risks (IMO). Bonds have additional risks (principal risks too), for the added risk you can get a higher return.

[TBH]

If you think you may buy in the next couple years, but you're just waiting to see how you like the area and where home prices go, I'd just put it all somewhere safe and liquid. Either bonds or CDs or a high-yield savings account.

If it looks like it will be longer than you thought before you buy, shift some into stocks. I like jIM_Ohio's equation for determining how much to put into stocks versus bonds.