Expert: Paul Henneman - 4/26/2007

Question
Hi Paul,

I am planning to relocate and do not want to commit in buying a home, however I am very confident in the area and would like to rent for a year or two while I establish myself.  I will be making about $200K profit on my current home and was wondering what kind of safe income can I expect with that amount before I use some or all as a downpayment?

I would like to utilize some of the interest income to offset some of the rent until I am secure and established in my new job.  What kind of interest would be safe to assume I can get for $200-$250K.  It would have to be liquid.

Thanks,

Anthony  

Answer
Anthony,
   Thank you for your question!
It appears that perhaps a CD (Certificate of Deposit) would be of most interest to you.  The advantage of a CD is that it is perfectly safe. You could take your 200k, purchase a one year CD, and know exactly what it will be worth in the year when it matures. Usually you can expect about a 4% return, or 5% by some institutions. This means that you would earn $10,000 on your 200k investment in one year.
   I realize that this is a relatively small return. However, the alternatives that could earn a higher return all involve risk. The stock market, mutual funds, and other such investments can offer returns many times higher. But this is only good in the long term. For a short term investment of a year or two, it is always possible that the market could actually go down rather than up, and your investments would likely decrease in value as well. Of course in most years the market rises, but with only a year or two to invest, it is a real risk. If you do choose this risk, best case scenario is perhaps a 20% return in a year, worst case is up to a 20% loss. What you actually experience will be somewhere in between (or in very rare cases even outside those parameters).  If you do want to take the risk, with some luck you could turn your 200k into as much as 240k  or more with a general S&P 500 Index mutual fund.
   Back to Cd's, which I believe from your question may of the most interest. The institution I like best for CD's is www.NetBank.com They offer some of the highest returns on CD's that I am aware of, and are FDIC insured (very important).  The problem is that this is not very liquid, although you could do 6 month or shorter CD's, so have access to the funds on a periodic basis when they mature on a more frequent schedule.
   The only other option I am aware of that would allow complete access with no penalty is a money market account. This is essentially a savings account that will earn you interest. You can usually write checks and have an atm card to access the funds whenever needed. However, the returns are lower, perhaps 3%. Again www.NetBank.com has some of the highest rates for this type of investment, perhaps a bit more than 3%.  Any major bank or financial service should offer both CD's and Money Market accounts.
   I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com