Investing Question -- What to do with home equity while renting?
 

I recently sold my house, and am currently renting while figuring out where I'd like to live for the long term. So I've got a tidy sum of money, effectively the down payment for my next house purchase, sitting quietly in a money market account, making pretty much zero interest. While I'm comfortable accepting some risk in some of my investments, I'm loathe to accept risk with this particular money. I also kind of hate to leave all that cash just sitting there staring at me, doing nothing. Assume that my investment in gold and lead is adequate. At this point, I don't know if I'll be renting for 1 year or 3, but a 1-2 year timeline is probably a reasonable projection.

What kind of investment options do I have -- something reasonably low risk with better returns than a money market over a 1-2 year investing horizon?

Thanks in advance.

Dan

The standard answer is hookers & blow.

You do pose a good question. I have some money is a money market account. It has been earning about 12% but I can convert it back to cash in just a couple of days if I had to.

Find a good financial planner and let him/her invest. Mine has been doing 5-7% the last few years. I can PM you mine, but you probably want someone local to meet face to face.

I have coffee with a retired Planner; he rarely see's anyone come out ahead picking their own individual stocks/gold/bonds, etc. By the time you get the word on the hot tip, it has already peaked.

Money market - earning 12%?

I agree. Calling BS on that.

1-2 year timeline is too short to put it in the stock market. If it was me and it was $$$ I needed to be secure then put it in a savings account or a term certificate. Anything returning 10-12 % involves too much risk. Gold is too volatile. This is $$ you cannot afford to lose.

I'd hate to sit on that much cash. I had a chance to sell my house and wait to buy another but never had the stomach. With my luck, there will be some major event causing hyperinflation. Growing up in Europe, hyperinflation was a constant fear, and I can't shake it off. Probably not well founded, but still, I'd worry. Also, the housing market is very volatile where I live. With my luck I'd sell low and had to buy high later.

If it is over 100k, split in 2 and put in 2 different banks. CDs or whatever cash that you can get to reasonably quick. I know FDIC insurance is 200k now, but I'd spread it around for good measure.

G

good advice

You could ladder into cd's as rates rise but unless you have a dumtruck load of cash yoru return is going to be minimal for 1-2 yrs. Dont forget you have to pay tax on short term gains, again depends on the duration of this.

Taking on a little more risk opens up some potential gain but also a loss in principle. I like a bond or divident etf with low volatility. Not guaranteed though.

1-2 year time frame and near 0 risk acceptance... I'd say it's exactly where it should be.

in the bay area, this would not work.

my co-worker did this. he now describes it as "he jumped off a moving ship". he has this wad of cash saved, but the housing market escalated faster, making his buying power smaller and smaller. he said he cant afford to buy a new home now. weird.

i am approaching this conundrum. i need to sell, but i want to be ready to buy as well. i hate timing problems.

good luck.

Cliff - I'd stretch into a second home and sell #1 later when the time is right. I would NEVER sell without buying first.

Georg

why not figure out where you want to live for the long term? generally don't leave more than 250k at any one bank.

^^^^ THIS....now get your butt moving asap and put that "dry powder" to use before interest rate increases FAR trump any returns you might "safely" get in the short term (1-3 yr). Nuthin' wrong with a boatload of cash if you've got all your other ducks in a row and quacking either imo. I've got a larger cash % than I EVER thought feasible (a hedge against riskier investments, etc.), but it just fits perfectly with my plans for the next 5-10 years too. In other words...it ALL just depends :D

Does capital gains tax from the sale of your house come into play at all? I thought I had heard somewhere that there is 2yrs from the sale of one property till the purchase of another that exempts you from paying capital gains tax.

That said, I'd try to find a rental house to buy, and rent out.

would like to hear more about this 12% MM account. I wish mine was even 1.2% I think it is like .5%.


An interesting variation on this question is how much risk do you have to assume for a low to moderate target return of say 4%?? Is there any investment at this rate that has a relatively low risk.

^^^^^ Me too!

Buy an air cooled 911 and sell at 50x it's current value in 2 years. What could possibly go wrong?

I just had this conversation with one of my kids and I suggested she stay in the RE market even if it is not where she will ultimately end up. Interest rates are still extremely low and the market is rising rapidly. Hard to find a better place to park funds with so much leverage working for you and a tax write off for interest.

She found a nice condo 1 block from the beach with an ocean view. Smart kid.

Smart dad too ;)

Excellent advice all around. I especially appreciate the wisdom of investing in hookers 'n' blow. ;)

So one difficulty is that I know with some certainty that I'm likely to move again, quite likely in the next 2-3 years, possibly as soon as 1 year. The Seattle area is complex enough, transportation-wise, that choice of home location and choice of job location can make a huge difference in commute. Right now, I work on the west side of the Puget Sound, but realize that a job shift into Seattle or Tacoma is perfectly reasonable. I could gamble and buy a house halfway between Seattle and my current job, but if my next job is in Tacoma instead, then I've bought myself into an hour and a half commute.

The other difficulty is the predictability of the market. Right now, in Kitsap County, prices are rising very steeply. The market here is behaving pretty similarly to what I remember the market behaving like in 2006. Houses are going on the market on Friday and being sold by Monday with multiple bids above list. Rental properties are even ridiculous -- 6 week wait lists at apartment complexes, and rental houses sitting vacant for less than a week between tenants. It's an unusually tough market to buy into. The median income for this county has been increasing at something like 1-2% for most of the last decade, but housing prices have been making better than 5% for the last 2.5 years. Now, maybe they're just making up for losses that happened during the great decline, or maybe we're seeing an increase in prices because of a huge tech boom in Seattle, or maybe people are behaving in a silly fashion. Maybe the market will correct in a year or two, or maybe it will continue happily along at 5%.

So that's all to say that investing in real estate right now seems like a pretty speculative venture, given the unknowns of where I'll need to be and what the market may do.

On the other hand, several of you make the point that NOT being in RE right now could price me out of the market pretty rapidly. Your point is well taken, though I'm not happy about the reality.


(sigh) So the real answer is: there isn't a good place to put money, really. Even keeping it in a money market merely assures that the number will stay roughly constant, but there's nothing I can do to protect the buying power of the money.

Thanks,
Dan

Capital gains don't figure into this home sale, fortunately. After the cost of improvements in the house that I sold, I did slightly better than breaking even. Even without that, it was well below the $250K limit for capital gains.