Smart Ways To Invest Your House Sale Profits

If you've sold your house, you'll hopefully be flush with cash. However, reinvesting the proceeds is important if you want to keep up with or beat inflation. Here are some investment ideas to consider:

- Pay off debt: This is usually one of the best ways to put a cash windfall to work.

- Invest in stocks: The best time to invest in stocks was long ago. The second-best time is today. The basic reason is that, on average, the stock market always goes up and it pays dividends all the while.

- Invest in real estate: This can be a profitable and adventurous field for many. However, with stocks at record highs, real estate is the most attractive investment going forward.

- Invest in bonds: Bonds are paying very little at the moment.

- Invest in peer-to-peer lending: Returns of over 7% seem very easy to achieve.

Paying off debt

If you have recently sold your house and are looking to pay off your debts with the cash, there are a few things to consider.

Firstly, selling your home is a difficult process, both financially and emotionally, and should be a last resort to pay off debt. Before considering selling your home, ensure that you have exhausted all other options. This includes maximising your income, cutting down on expenses, and selling any other assets.

However, there are two situations in which selling your home to pay off debt can be a good idea. The first is if your mortgage payment is too high, preventing you from making progress on paying off your other debts. The second is if you were planning on moving anyway.

If you decide to sell your home, there are a few steps you can take to ensure you are making the most of your money. It is recommended that you sit on your cash for at least a month before making any decisions, to avoid making hasty choices. You should also be sure to set aside enough cash to cover at least three months of living expenses in an emergency fund.

When paying off your debts, it is a good idea to start with any high-interest debt, as this will save you the most money in the long run. Credit card debt, for example, often comes with very high interest rates, so it is a good idea to pay this off as soon as possible.

If you are planning on buying another house, you will need to ensure that you have enough cash left over for a down payment on your new home. You should also be aware of any taxes you may need to pay on the profits from your home sale, as these could eat into your cash reserves.

Finally, if you are still unsure about what to do with your money, it is recommended that you consult a financial expert for advice.

Investing in stocks

• Do your research: Before investing in any stock, it is important to thoroughly research the company and its financial health. Look at their financial statements, analyse their business model, and assess the competitiveness of their industry.
• Diversify your portfolio: To minimise risk, it is important to diversify your investments across different industries and sectors. This way, if one stock performs poorly, it will not significantly affect your overall portfolio.
• Consider using a practice account: If you are new to investing, consider using a virtual trading account or a financial website's practice portfolio to get a feel for the market before investing your money.
• Practice realistic trading: When practising, it is best to simulate the conditions under which you will be trading. For example, if you plan to invest with a smaller sum, practising with a $100,000 virtual account may not be the best representation of your future trades.
• Consider dollar cost averaging: This strategy involves investing a fixed dollar amount at regular intervals, regardless of the share price. This helps to reduce the impact of market volatility and can be a good way to build your portfolio over time.
• Be cautious of timing the market: Trying to predict the market and time your trades accordingly is a difficult task, even for experienced investors. It is generally recommended to invest for the long term and avoid trying to time the market.
• Consider tax implications: When investing, remember to consider the tax implications of your trades. Consult with a financial advisor to ensure you are making the most tax-efficient trades.
• Invest for the long term: The stock market tends to go up over time. By investing for the long term, you can ride out short-term volatility and benefit from the market's overall upward trend.

Remember, investing in stocks always carries risk, and it is important to do your own research and consult with a financial professional before making any investment decisions.

Investing in real estate

Rental Properties

This strategy is ideal for individuals with DIY skills and the time to manage tenants and properties. It requires a substantial upfront investment and cash reserves to cover maintenance, vacancies, and unexpected costs. However, it can provide regular income and potential appreciation, and the income streams can be leveraged to acquire more properties.

Real Estate Investment Groups (REIGs)

REIGs are suitable for those who want to own rental real estate without the hassle of hands-on management. They are similar to mutual funds, pooling money from multiple investors to invest in rental properties. A company manages the properties, and investors receive income even if their unit is vacant, as long as the overall vacancy rate is low.

Flipping Properties

This strategy is akin to day trading in the stock market. It involves buying undervalued properties, renovating them, and selling them quickly for a profit. It requires significant experience in real estate valuation, marketing, and renovation. Flipping can be risky, as it requires accurate cost estimates and quick sales to avoid losses.

Real Estate Investment Trusts (REITs)

REITs are ideal for investors seeking portfolio exposure to real estate without the complexities of direct ownership. They are publicly traded companies that own and operate income-producing properties, such as malls and office buildings. REITs pay out high dividends, and investors can buy and sell shares on exchanges like stocks.

Online Real Estate Platforms

These platforms, also known as real estate crowdfunding, allow investors to pool their resources and invest in large commercial or residential projects. They offer diversification and the opportunity to invest in real estate with a relatively modest stake. However, these investments tend to be illiquid, with lock-up periods, and management fees that can reduce profits.

Your Own Home

Investing in your own home is the most common way to invest in real estate. You build ownership over time through mortgage payments, and with luck and strong market demand, you can cash in on the equity when you sell. However, returns on primary residences tend to be lower than other real estate investments, and costs like maintenance, repairs, and property taxes can eat into profits.

Other Options

There are also less traditional ways to invest in real estate, such as house hacking, where you rent out rooms in your own home, or using platforms like Airbnb to offer short-term rentals. These options can provide income and allow you to test the waters of real estate investing with less commitment.

Remember, real estate investing carries risks, and markets can go up and down. It's important to carefully consider your financial situation, conduct thorough research, and, if needed, consult a financial advisor before making any significant investment decisions.

Investing in bonds

There are two main ways to make money from bonds:

• Hold the bonds until their maturity date and collect interest payments. Bond interest is typically paid twice a year.
• Sell the bonds at a higher price than you paid for them. Bond prices can rise due to an improvement in the borrower's credit risk profile or a decrease in prevailing interest rates for newly issued bonds.

When considering investing in bonds, it is important to keep in mind the pros and cons.

Pros:

• Safety: Bonds are generally considered a safe investment option as their values don't fluctuate as much as stock prices.
• Income: Bonds offer a predictable income stream with fixed interest payments, usually made twice a year.
• Community Impact: Investing in municipal bonds can help fund public projects such as building schools, hospitals, or public gardens.
• Diversification: Bonds can reduce your financial risk by diversifying your portfolio. While stocks have historically outperformed bonds over the long run, having a mix of both can lower your overall risk.

Cons:

• Less Cash: Bonds require you to lock up your money for extended periods, limiting your access to the invested funds.
• Interest Rate Risk: Bonds are sensitive to interest rate changes. If you buy a bond with a certain interest rate and the issuer later offers a higher rate, your bond will drop in value.
• Issuer Default: Although uncommon, there is a risk that the issuer may default on their obligations, resulting in a loss of interest payments and/or principal repayment.
• Transparency: The bond market has less transparency than the stock market, making it challenging to determine if you're getting a fair price.
• Smaller Returns: The return on investment from bonds is typically lower than what you would get from stocks.

When deciding whether to invest in bonds, consider your risk tolerance, your current portfolio allocation, and your financial goals. If you're risk-averse, heavily invested in stocks, or nearing retirement, bonds may be a suitable option to explore further.

Additionally, it's important to note that there are different types of bonds available for investment, including corporate bonds, municipal bonds, and treasury bonds, each with its own benefits and drawbacks.

Overall, investing in bonds can be a great way to lower risk, generate a steady income stream, and diversify your portfolio, especially if you're looking for a more conservative investment strategy.

Investing in peer-to-peer lending

How Peer-to-Peer Lending Works

Peer-to-peer (P2P) lending connects individual borrowers directly with individual lenders, bypassing traditional financial institutions like banks. P2P lending platforms typically set their own rates and terms, with interest rates based on the borrower's creditworthiness. The process usually involves borrowers submitting loan applications and being assigned a risk category, after which they receive loan offers from investors. The platform facilitates the money transfer to the borrower and the monthly loan payments to the lender. Some popular P2P lending platforms include Funding Circle, Kiva, LendingClub, Prosper, and Upstart.

Advantages of Peer-to-Peer Lending

There are several advantages to investing in P2P lending:

• Low Barrier to Entry: You can create a P2P portfolio with a minimal amount of capital, often as little as $25.
• Monthly Income: Investors receive monthly payments from borrowers, providing a steady stream of passive income.
• Higher Yields: P2P lending offers the potential for higher returns, with some investors reporting average annual returns of more than 10%.
• Specific Control: Investors can choose the types of loans they want to fund, as well as the credit score range and debt-to-income ratio of borrowers they want to work with.
• IRA Friendliness: Some platforms offer the ability to set up standard IRAs, Roth IRAs, or roll over 401(k)s, providing tax advantages.
• Loan Diversification: Investors can fund entire loans or purchase notes in small increments, spreading their risk across multiple loans.

Disadvantages of Peer-to-Peer Lending

There are also some risks and disadvantages to consider:

• Potential Defaults: P2P loans are typically unsecured, and the default rates can be higher than in traditional lending.
• No FDIC Protection: Investors are not protected by the Federal Deposit Insurance Corporation if the P2P platform fails or if a borrower defaults.
• Capital Depletion: Principal and interest payments on P2P loans are recovered simultaneously, which differs from traditional securities where the original capital is returned at the end of the term.
• Lack of Liquidity: P2P loans currently have a non-existent secondary market, so they are best treated as long-term investments.

Tips for Investing in Peer-to-Peer Lending

To minimize risk and maximize returns, consider the following tips:

• Diversification: Spread your investments across multiple loans and platforms to reduce the impact of potential defaults.
• Creditworthiness: Focus on borrowers with higher credit ratings and lower debt-to-income ratios to lower the risk of default.
• Platform Selection: Carefully research and select reputable P2P lending platforms that comply with relevant regulations and have clear policies and fee structures.
• Reinvesting: Reinvest your loan payments to maintain a fully invested position in P2P lending and maximize returns.
• Risk Management: Keep P2P investments to a small percentage of your fixed-income portfolio to balance risk and reward.

Frequently asked questions