Is It Best To Use A Chunk of Cash To Pay Off My Mortgage, Or Do I Invest In A Rental Property?

Is It Best To Use A Chunk of Cash To Pay Off My Mortgage, Or Do I Invest In A Rental Property?

Would it be better to take $100,000 and pay off my mortgage on my primary residence or take the same $100,000 and buy a rental property with only cash?

It’s a good question, but there are way too many variables to give you one particular answer. If you’re young, you may opt to keep the mortgage on your home and use that leverage to start buying rental properties with an aim toward developing an investment income rental portfolio.

If you’re retired and need income, it may be better to pay off the mortgage and live off whatever sources of income you have without the burden of a mortgage on your home. If your choice was between putting the $100,000 in the bank at virtually no interest income and paying of a 4 percent mortgage, the pay down of the 4 percent mortgage might be better for you financially. Also, tying up that much cash in a rental property later in life may not be the best use of that cash.

Again, each of these answers depends on what other sources of income you might have, what your involvement will be in the rental property, what level of risk you’re willing to accept, and what need you might have for those funds in the near future.

There are other things to consider when it comes to the mortgage on your primary residence. What’s the interest rate? If you’re paying on a mortgage at 8 percent, you could use the $100,000 to refinance that loan at a far lower interest rate, shortening the loan term.

The same might be said about high interest rate car loans. If your car loan is at 5 percent or 6 percent, getting that paid off is an excellent use of funds.

If your finances are in good shape, you have good credit and you are in a place that you can afford to buy a rental property, then we’d encourage you to look at your options and figure out what is the best move looking forward.

Remember that investing in rental property will require you to manage the rental, find tenants, manage the rental income, take care of the property, monitor the tenant’s use of the property, find replacement tenants and understand how owning a rental property will affect your federal income taxes.

On the federal income tax side, if you have no loan on the property, you may show a profit on the rental income you receive. But if you have a loan on the rental property, your income will be offset by the expenses. Where you don’t show a profit, you won’t pay federal income taxes on any money coming from the rental property.

You’ll want to talk to a good accountant to walk you through the federal tax implications of owning the rental property and see how it might benefit you. Depending on the value of the property you are buying, you might want some debt on it.

Thinking about all of these details and how they fit into the big picture of your finances (and where you are in what Ilyce refers to as the “cycle of life”) will help you make this decision. Good luck.
via Washington Post 

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