How to Invest Money After Selling a House

How to Invest Money After Selling a House

If you've got money leftover after selling your house, here's how you can invest to make the most of it.

Oct 20

How to Invest Money After Selling a House
Real Estate

Real Estate

Family

Family

High Yield Savings

High Yield Savings

Is the cash from your recent home sale burning a hole in your pocket? This especially might be the case if you've sold recently, as profits jumped in over 90% of housing markets in 2020, increasing to an average home-price gain of $68,843 compared to $53,700 in 2019, according to a study by ATTOM Data Solutions.

Though it may be tempting to throw your windfall straight into the markets to reap some returns, you'll want to take some time to consider your situation before immediately tying up the money in stocks or another investment. We'll take you through the questions to ask yourself to decide what to do with your home sale proceeds, as well as some of the best ways to invest the funds if you decide to do so.

Do you want to reinvest the proceeds into another property or save them?

This is the key question to answer before going any further — there's no sense in deciding how to invest your home sale proceeds only to end up using them for a down payment on another property. 

Your situation will inform how you think through this question. For instance, if it was a rental property you sold, you might not feel as much urgency to reinvest in another property and might have more flexibility to consider other possible investment options. On the other hand, if you sold your primary home, you'll need to consider your plans for your next living situation and what makes the most financial sense. If you decide to save the funds and invest them elsewhere, you'll have to figure out a solution to your living situation.

5 questions to ask yourself before investing money after selling a house

Before you move forward with investing your funds, you'll want to pause and think things through. Here are five questions to make sure you've answered:

1. Do you have a primary residence?

Before you go ahead and spend the money you made from selling your house, it's important to make sure you still have somewhere to live. If you no longer have a primary residence and are considering investing your money, you'll have to think about whether or not you are willing to rent — and whether doing so makes financial sense.

2. Is now a good time to buy a house where you live?

When you're deciding what to do with your money you'll want to think about whether now is a good time to buy, or if you'd be better sitting tight and holding off for a while. Can you find the type of property you want, in your budget, in the current market? 

Also think about whether you'd want to stay in your newly purchased home for at least a few years. Experts generally recommend staying in a house at least this long before selling to avoid losing money on the investment. If you think you'll want to be packing up sooner than that, you might be better off renting.

3. If you sold a rental property, are there rental properties you could reinvest in?

If you sold a rental property, you'll want to consider whether there are rental properties in your area in which you could reinvest that would give you a good cash flow. And if there are, you'll want to ask yourself if you're really willing to recommit to doing the work of property management and maintenance. While owning a rental income can certainly provide income, it's not totally passive, as you likely learned from your previous endeavor.

4. What returns could you get by investing that money elsewhere?

Before you commit to putting your money straight back into a real estate property, you'll want to consider whether that's really your best return on investment. You might find that returns are better in the stock market or from a different avenue into real estate, like REITs or real estate crowdfunding. Or maybe you'd really be best served by paying off high-interest debt that's been weighing you down.

5. What is your risk tolerance for this money and when will you need to access it again?

When it comes to investing, it's important to have a clear sense of how much risk you are willing to take and how soon you will need to access the funds you're investing, as these factors will shape your investing strategy. If you're not planning to touch your money until you retire in 30 years, you likely can take more risk and try out less liquid investments than if you're planning to use your funds in a couple years to buy a vacation house. In the latter case, you may want to play it safer with your investments as you won't have as much time to ride out any market ups and downs and recoup losses.

Do I have to pay capital gains taxes on my home sale if I reinvest the proceeds?

Before you start investing your home sale proceeds, you'll want to take a step back to see if you'll owe taxes. If you're single, you won't pay capital gains taxes on the first $250,000 of proceeds ($500,000 if you're married and filing jointly) as long as you meet certain eligibility requirements. This means that if you bought a home for $300,000 and sold it seven years later for $450,000, you wouldn't be taxed on the $150,000 gain, assuming you're eligible. 

In order to qualify for the exclusion, you typically must have:

  • Owned and used your home as your primary residence for at least two of the five years prior to the sale date
  • Not excluded the gain from the sale of another home anytime during the two years before the sale of your home

The IRS does allow some exceptions to the eligibility requirements. 

In general, however, if you don't meet these requirements or your home sale proceeds exceed the thresholds, you will owe capital gains tax. If you find yourself facing capital gains tax, keep in mind that there are some ways to avoid the tax or at least lower the amount you owe. This may help inform your decision of what to do with the home sale proceeds.

Other ways to spend home sale proceeds

While investing is certainly a good option, it isn't the only way you can spend the proceeds from selling your house — nor is it necessarily the best choice for your financial situation. Here are some of your options for making use of the funds.

Pay off debt

Especially if you have any high-interest interest, paying it down should take precedence over investing. High-interest debt is any debt that's considered expensive — think double-digit interest rates, like for a personal loan or a credit card balance, for instance. Settling these debts can save you serious money over the long run by avoiding further interest accruing.

Bulk up your emergency fund

Similar to paying off high-interest debt, a healthy emergency fund is a financial staple. Before you move on to the deeper cuts, make sure you have enough money stashed to fall back on in case life throws you a curveball, like a sudden job loss or an unexpected home repair. Experts generally recommend having at least three to six months' expenses in your emergency fund, and your home sale proceeds could be a great way to quickly beef yours up.

Save it for another down payment

If you know you'll want to buy another house in the near future but just aren't quite ready yet, another option is to save the home sale proceeds to put toward your next down payment. In general, you'll want to aim for a 20% down payment, so you'll need to determine how much you'd like to spend on your next home to benchmark what you'll need to save for an adequate down payment. Some options for where to stash your down payment for your future home include high-yield savings accounts, certificates of deposit and real estate investment trusts.

Save for your kid's college education

You could also earmark at least some of the funds to save for your child's college education. Even if they're still in diapers, keep in mind that the earlier you start saving means the more time your investments have to grow. You could always opt for the classic way to save, the 529 savings plan, or you could consider whether an alternative option — such as an individual retirement account (IRA), a Coverdell Education Savings Account (ESA) or UTMA and UGMA accounts (custodial accounts) — might be a better fit for your financial situation.

Invest the money

If you've covered your financial basics and don't have any other pressing financial priorities, investing is certainly a good way to make use of a sudden windfall, like a chunk of cash from selling your house. As you research investment opportunities, think carefully about your risk tolerance as well as how soon you might need to access your cash. Ideally, you'll earn higher returns through investing than what you might have gotten from purchasing another property.

Best places to invest home sale proceeds

If you've decided to invest the money, here are some options for how to invest based on your expected time horizon:

If you'll need the money in less than 3 years

If you're thinking you'll need your money in less than three years, you'll want to opt for investments that are relatively low-risk and can be easily liquidated. Some options to consider include a money market account, a certificate of deposit and a high-yield savings account. When it comes to high-yield savings accounts, online banks like AXOS Bank or Marcus by Goldman Sachs tend to offer the best rates.

If you'll need the money in 3 to 5 years

If you have between three and five years before you'll need to touch your home sale proceeds, you could still consider any of the above options in addition to mutual funds, index funds, ETFs, short-term bonds and peer-to-peer loans. Keep in mind that these options have various levels of risk. For instance, while mutual funds are less risky than individual stocks, you could still lose that money, whereas with savings products like money market accounts and CDs your money is FDIC-insured, which means it's protected in case your financial institution were to fail.

A robo-advisor like Vanguard Digital Advisor or Ellevest can help you create a portfolio that aligns with your risk tolerance level as well as your time horizon if you're not sure which investment strategy is quite right for you.

If you'll need the money in 5+ years

If you don't think you'll need to dip into your home sale proceeds for more than five years, you have a little more leeway in where to invest the funds. For instance, you could pour more into your retirement account, or you could invest in mutual funds, stocks, real estate crowdfunding, farmland, art collectibles and more. It really all depends on your risk tolerance and whether you're aiming for growth or capital preservation. Also consider whether you'd like to earn passive income from your investments, such as through dividends.

If stock trading is the route you want to go, consider a platform like Interactive Brokers. Or if you think farmland is where you want to invest your home sale proceeds, a platform like FarmTogether might be worth a try.

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