Investing home sale proceeds, looking to future property purchase
March 28, 2024 9:45 AM Subscribe
Age 50. Recently sold my home, netting about $140K. Have some questions about short- to mid-term savings, risk vs. reward, etc.
I'll try to keep this tight. I know there is decent info on Reddit and elsewhere, but I've found MeFi's community more focused and helpful.
I recently sold my home in the Midwest, netting about $140K, and moved to the Pacific Northwest. Housing costs here are far higher - perhaps 50-65% more to purchase equivalent property in my community. I'm currently a renter.
I have separate funds (Roth IRA, state pseudo-pension, social security) to rely on for retirement.
I'd like to invest this money in a way that balances risk and reward, and look to purchase property within 10 years - likely a condo, apartment, or house with an ADU (Accessory Dwelling Unit, a.k.a., mother-in-law unit).
Initial thoughts are splitting it in three 'buckets'. I use Vanguard as my broker.
* Short term, lower risk investments like CDs.
* Total market index funds
* Higher risk small cap or specialized indexed funds
What do folks think about this strategy? Anything I should consider, anything I'm missing? One thing I'm assuming is that growth of my investment will outpace housing prices. But if that is false, if housing prices climb at 12% a year, for example, it will be hard to afford anything in the future.
I'll try to keep this tight. I know there is decent info on Reddit and elsewhere, but I've found MeFi's community more focused and helpful.
I recently sold my home in the Midwest, netting about $140K, and moved to the Pacific Northwest. Housing costs here are far higher - perhaps 50-65% more to purchase equivalent property in my community. I'm currently a renter.
I have separate funds (Roth IRA, state pseudo-pension, social security) to rely on for retirement.
I'd like to invest this money in a way that balances risk and reward, and look to purchase property within 10 years - likely a condo, apartment, or house with an ADU (Accessory Dwelling Unit, a.k.a., mother-in-law unit).
Initial thoughts are splitting it in three 'buckets'. I use Vanguard as my broker.
* Short term, lower risk investments like CDs.
* Total market index funds
* Higher risk small cap or specialized indexed funds
What do folks think about this strategy? Anything I should consider, anything I'm missing? One thing I'm assuming is that growth of my investment will outpace housing prices. But if that is false, if housing prices climb at 12% a year, for example, it will be hard to afford anything in the future.
A deposit in Vanguard's VMFXX money market will currently give you well over 5% with no obvious risks, which you can withdraw or reinvest at any time without penalty if the right real estate transaction or changes to market conditions arise. The downside is that you'll pay yearly taxes on the earnings. Brokered CDs aren't generally earning substantially more.
This may not be the right long term investment for you, and I wouldn't put money into VMFXX thinking it would stay there for 10 years, but it's an amazing short term resting place right now while you figure out what direction you want to head, and easy to reinvest in index funds if you feel that's the right direction or when the Fed starts lowering rates.
posted by I EAT TAPAS at 10:55 AM on March 28 [3 favorites]
This may not be the right long term investment for you, and I wouldn't put money into VMFXX thinking it would stay there for 10 years, but it's an amazing short term resting place right now while you figure out what direction you want to head, and easy to reinvest in index funds if you feel that's the right direction or when the Fed starts lowering rates.
posted by I EAT TAPAS at 10:55 AM on March 28 [3 favorites]
Are you looking for perspectives on the general strategy or just the investing strategy? If you weren't anonymous, I'd ask why you weren't interested in purchasing now or sooner than ten years anyway. While there's some push to build more housing in the Pacific Northwest and ultimately that might help slow the increase of housing prices, I don't really think Seattle or Portland or any of our housing-deprived cities are going to become more affordable any time in the next ten years. Are you hoping to get more to buy more? I don't think you can out-compete others in the stock market or housing market, especially as we have more and more folks moving from California (climate refugees) and more conservative places (LGBTQ refugees). The folks from California think houses here are cheap, and it's hard to compete with that.
Also, a house with an ADU is a very different purchase than a condo or townhome. Are you thinking you'd live in the ADU and rent the house? Because houses with ADUs are priced with that in mind, and much more expensive. However, if you wanted a condo or townhouse or smaller home, you could buy one now with a mortgage, and then plan to refinance when interest rates inevitably drop. Rent isn't cheap here, so I am guessing you might be able to cover the mortgage on a condo or townhouse if you use most or all of your $140,000 towards a down payment.
I think you should also calculate into your planning the amount you are spending on rent that isn't going to a mortgage. I can't imagine you're renting for $1000/month, but let's say you are. That's $12,000 year and $120,000 in ten years. If you're paying $2000/month, that's $240,000 in ten years. Why not put that towards a mortgage?
I also agree that, if you know you want to use this money for a down payment, you can't go for risky investments at all. Lots of folks think they can outsmart or time the market, and most are wrong.
posted by bluedaisy at 11:10 AM on March 28 [5 favorites]
Also, a house with an ADU is a very different purchase than a condo or townhome. Are you thinking you'd live in the ADU and rent the house? Because houses with ADUs are priced with that in mind, and much more expensive. However, if you wanted a condo or townhouse or smaller home, you could buy one now with a mortgage, and then plan to refinance when interest rates inevitably drop. Rent isn't cheap here, so I am guessing you might be able to cover the mortgage on a condo or townhouse if you use most or all of your $140,000 towards a down payment.
I think you should also calculate into your planning the amount you are spending on rent that isn't going to a mortgage. I can't imagine you're renting for $1000/month, but let's say you are. That's $12,000 year and $120,000 in ten years. If you're paying $2000/month, that's $240,000 in ten years. Why not put that towards a mortgage?
I also agree that, if you know you want to use this money for a down payment, you can't go for risky investments at all. Lots of folks think they can outsmart or time the market, and most are wrong.
posted by bluedaisy at 11:10 AM on March 28 [5 favorites]
Consider buying Treasury bills through a brokerage such as Fidelity or Vanguard - you can also purchase them directly from the U.S. Treasury through TreasuryDirect, but you won't be able to quickly sell if you need money quickly. An advantage over CDs is that treasury bills are exempt from state or local taxes.
posted by needled at 12:15 PM on March 28 [2 favorites]
posted by needled at 12:15 PM on March 28 [2 favorites]
The phrase "within 10 years" is doing a lot here. There is a big difference between "I am likely to need the money within the next 2-4 years and a drop in the market would be devastating", vs "I won't start looking until about year 7, so market ups and downs in the meantime are cool." Unless you can dial in your timeline a bit, there isn't a way for anyone to give good advice, honestly.
If the timeline is short-term, put the money in some version of a high yield savings account or Vanguard money market fund. But if it's long-term, then you are probably going to do best (on average, not guaranteed) by putting it in low-cost index funds and leaving it alone.
Personally, when faced with a somewhat similar choice a few years ago, I put the money in index funds and got lucky since things were on an upswing. But in hindsight, that was totally the wrong choice because a drop would have messed my plans up and I shouldn't have taken that kind of risk. The extra money I gained was trivial compared to the downside risk of a market slump and not being able to buy a house.
Lastly: there is likely to be a numerically-correct answer, and an emotionally-correct answer, and they might not be the same. Related to that is the whole rent vs buy consideration, which people tend to have strong feelings about but in reality both can be good long-term choices. $140k doesn't buy you a lot in the PNW, so you'll need to think about the reality of taking on a possibly large mortgage right at the beginning of retirement and how that makes you feel.
posted by Dip Flash at 6:01 PM on March 28
If the timeline is short-term, put the money in some version of a high yield savings account or Vanguard money market fund. But if it's long-term, then you are probably going to do best (on average, not guaranteed) by putting it in low-cost index funds and leaving it alone.
Personally, when faced with a somewhat similar choice a few years ago, I put the money in index funds and got lucky since things were on an upswing. But in hindsight, that was totally the wrong choice because a drop would have messed my plans up and I shouldn't have taken that kind of risk. The extra money I gained was trivial compared to the downside risk of a market slump and not being able to buy a house.
Lastly: there is likely to be a numerically-correct answer, and an emotionally-correct answer, and they might not be the same. Related to that is the whole rent vs buy consideration, which people tend to have strong feelings about but in reality both can be good long-term choices. $140k doesn't buy you a lot in the PNW, so you'll need to think about the reality of taking on a possibly large mortgage right at the beginning of retirement and how that makes you feel.
posted by Dip Flash at 6:01 PM on March 28
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So, consider some bond funds (less risky than stock maket and lower returns but better than very short term investments) and maybe more conservative stock funds. Or just ladder a bunch of CDs.
posted by metahawk at 10:02 AM on March 28 [3 favorites]