Author Topic: Selling a paid off home and renting, how to handle proceeds of home  (Read 3368 times)

johnnyfive

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Hello all.

Early 30s/M/single, likely to marry/have kids in 1-2 years. I just sold my paid off home and moved cities, and will be renting for likely 1-3 years. The cash proceeds from my home are roughly 50% of my net worth, so it's a pretty big chunk of money to me, at least. I'm looking for some feedback on my plan of how to handle the situation. Comments welcome.

General financial picture:
Tax-advantaged accounts: 150k (index funds)
Taxed accounts: 150k (index funds)
Cash/E-fund: 60k
Home proceeds: 375k
Income: ~180k

If I were buying a home right now, I would likely be putting most of the money into it instead of the minimum 20% down. Ideally if/when I buy in 1-3 years I can still do this, but if the market was down I would be willing to put only 20% down, so any money invested now isn't necessarily on a short time horizon.

Plan I'm considering:
-Dollar-cost-average the lump sum over the next year into my standard mix of vanguard index funds in a taxable account. 25% every 3 months. If the market drops non-trivially, possibly dump all of the remaining amount at one of the 3 month points.
-Once back at my current e-fund level in cash, continue to invest in taxable account with monthly cashflow
-Once we seriously start talking buying a home, stop the monthly cashflow investing to build down payment
-At time of purchase, possibly sell a chunk based on where the market is at, what the mortgage rate is, and whether any gains fall in short-term or long-term cap gains, or possibly only put 20% down if it doesn't seem worth pulling out of the market

General comment:
-I've seen the study that when having a large sum of money, you're better off on average investing it all at once instead of dollar cost average investing it over some period of time. I would be interested to see that study redone only for starting points where the market is at an all-time high (yes I know this is a large fraction of the time, but it might move the final result non-trivially). Regardless, with this large of a % of my net worth in a single transaction, it seems like the reduced risk is worth the lowered average return.
« Last Edit: June 06, 2014, 11:31:54 AM by johnnyfive »

viper155

  • Bristles
  • ***
  • Posts: 258
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #1 on: June 06, 2014, 11:40:39 AM »
You are better off posting this on the Bogelhead forum.
« Last Edit: June 06, 2014, 12:50:30 PM by viper155 »

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #2 on: June 06, 2014, 09:10:26 PM »
A third idea, sort of, would be to invest $300 to 325 of the $375 proceeds over the next year (plan on leaving $50-75k liquid).

As far as lump sum vs $ avg, just do whichever makes you feel more comfortable. In either case, history suggests you are more likely to come out ahead just dumping it into the market, but this is also on a 10+ yr horizon. If it helps you sleep at night, just set up an automatic contribution of $5k/week, so whether the market goes up or down, you can still participate AND sleep better at night.

In either case, your gains/losses from one strategy vs the other are not going to be significantly different.

The notion that you are better off by dumping into the market is wrong, because the studies I have seen suggest two options: a) Dump all money at one, b) $ avg into the market over 12-24 months (but do not value the real option I describe below).

Your chances of outperforming are actually better if you $ avg, here's why:

- If the market jumps 15%, it becomes even more likely those gains are transient, and will likely revert to "normal" levels at some point in the future. You can hold back the majority of your funds, and wait for a better point of entry.
- If the market tanks 15%, it will be obvious that this is at least a somewhat favorable point of entry, and you can pour in your funds on the way down at a rapid pace ($10k/week, $20k/week, whatever you feel depending on how steep the drop). Most studies do not include the value of this real option in the calculation.

This is why I believe $ avg is the better strategy when investing a large % of your assets in a relatively short period of time.

Also, you didn't ask this, but to ease your sleep even more, I'd just plan on investing all but $50k of your initial purchase (so $110 cash total projected), so you have the majority of a future down payment on hand and can move quickly if the bank(s) give you lip-service, just offer to put down 25% or 30% and they'll likely shut up (worked for me in the past).

Then, you can just continue investing as your normally do, without wondering about how to fund a down payment.

It's just easier that way, IMO.
« Last Edit: June 06, 2014, 09:15:20 PM by rmendpara »

livingthedream

  • 5 O'Clock Shadow
  • *
  • Posts: 70
    • Becoming Financially Independent
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #3 on: June 07, 2014, 08:59:41 AM »
I'm in the same situation. Our house closed yesterday and we picked up a check for $397K. We also sold a house in May 2008 and had about $350k at closing. In 2008 I invested $100k in a mix of VTSMX, VGTSX, and TIPS and kept the rest in money market accounts. When the bottom fell out of the market I didn't panic and sell because I didn't need money and still had my cash.

Looking back I wish I had invested more in 2009 but hung on to the cash to make the down payment on the last house. We also did a mini-retirement traveling through Mexico, Central America, and a tour of most of the National Parks in the West in an RV. So long story short I wouldn't and won't just dump it all into the market at one time.

Icecreamarsenal

  • Pencil Stache
  • ****
  • Posts: 513
  • Location: New Jersey
  • Burnt
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #4 on: June 10, 2014, 04:38:49 PM »

You are better off posting this on the Bogelhead forum.
Why? Are they technically more competent? I've yet to visit, but will now.


Sent from my iPad using Tapatalk

Spartana

  • Guest
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #5 on: June 10, 2014, 05:34:23 PM »
I'm in the same situation as I plan to sell my paid off house and travel for awhile (couple of years) and rent in various places of the country before buying another house. But am already FIRE'd with a pension that will cover my living expenses so not dependent on my house-sale money for my future income needs except to buy another house. So want to just stash it somewhere safe and fairly liquid (bank CDs probably) for now until I have a clearer vision of what my long and short term goals will be.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 35
  • Location: Missouri
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #6 on: June 10, 2014, 06:43:18 PM »

You are better off posting this on the Bogelhead forum.
Why? Are they technically more competent? I've yet to visit, but will now.


Sent from my iPad using Tapatalk

Their entire forums is effectively our investor forums. So there is a lot more traffic, and you get a lot more responses. Now, every response says "Buy Vanguard index funds." so things aren't too different from here.

Bearded Man

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #7 on: June 10, 2014, 06:56:01 PM »
I didn't see WHY you plan on renting. Personally I would not pay cash for a house with such low interest rates available. I paid cash for my first house in 2010, but put minimum down in 2012/2013 when I bought another house. I would stick most of your money into index funds and other diverse investments and have 6-12 month emergency fund in a CD.

AssetGrinder

  • Stubble
  • **
  • Posts: 114
  • Location: Victoria BC Canada
    • Asset-Grinder Finance Blog
Re: Selling a paid off home and renting, how to handle proceeds of home
« Reply #8 on: June 11, 2014, 02:04:32 PM »
If you only plan on renting to one to 3 years I would stay away from index funds if You may need that house money for a new purchase down the road. I would put that majority into fixed income. Either short term laddered bonds 1-4 year and at least 300k of it. Look at investment grade corporate bonds for higher yield there in the 4%+ range. The other 75k I would put toward your current index funds or more specific dividend funds for some passive income coming back to you. Best of luck to you!