Should I pay off rental house $30k (paying 6.75%)or invest my $40k savings in mutal funds,cds,401K ? 45yr old?

Answer 1

There is no best answer to this question in my opinion. Now a 401k is out of the question in this instance as are IRA accounts. You can not place the entire amount all at once into any of these.

Over a long period of time, mutual funds do tend to return about 10% annually. But there can be a great deal of variance to that return. Durning the period 2000-3, many mutual funds in fact most had a negative return and many have not yet fully recovered six years later. Keep that in mind.

It really comes down to a question of the risk you are willing to take. A sure 6.75% return before taxes, as opposed to a potential 10% return before taxes.

Remember the old saying, "A bird in the hand is worth two in the bush."

Answer 2

Unfortunately it depends. Is the property for Cash Flow or Equity investment? Also depends on the Rental rate vs. the market value of the house.

For most people around 45 it would be wiser to invest the $40K rather than paying off mortgage on the Rental property. Because the Interest cost - while it takes away from your rental cash flow is also tax deductable. Therefore your renter is paying the cost of your euity investment in the house.

The question about what to do with the $40K is also "it depends". But if the rental house is a good investment. You may consider using it as a down payment on another property. Assuming you are investing long term (20 plus years since you are 45). Real estate or mutual funds would be the best place for the money. CDs, Bonds and T-Bills provide far too little returns (less than the 6.75% cost of the mortgage), and would only use those investments if you may need the money in the short term (within 6 years).

Answer 3

You don't say who your 401k is with...if it's your company and you are the sole employee and you plan on making over 200k this year then the 401k is the way to go. Certainly the mortgage at about 5% (not 6.75) return isn't bad but over 20 years the compounding effect of the market will surpass that.

You also don't say how large your 401k is in relation to your real estate....If most of your retirement is in real estate you're weighted WAAAAY to heavily that way and the other options are better no matter what the return is. It seems odd to me that people hammer the folks at ENRON for putting all their eggs in one basket yet see no problem with 80% of their retirement funds tied up in real estate in the same region of the country. HELLO people!!!!

But in general...If it's not your company then to the extent you can get something into a tax deferred vehicle...do that! 15.5k in 401k, next will be IRA (if eligible for anything), then pay down the house with rest.

Answer 4

If you're confident that you can make more than 6.75%, then definitely invest. In my opinion, you ought to be able to average more than that over the long run. Plus, at 45, you have a lot of years ahead of you. Anyway, the 6.75% exists as a tax write-off for you, so I wouldn't worry too much about it, as long as the property is secure.

I say invest...but not in CD's. You'll never make enough there to cover your opportunity cost. Mutual funds are ok, and you could easily think about moving some of it into a retirement account over time. I think you've got enough that you could start thinking about owning individual stocks, though, if you can find someone knowledgable and trustworthy to manage your holdings for you, that may be more lucrative.

Best of luck to you.

Answer 5

Get $4k into an Ira if don't have 1. Can't put more unless self-employed. Pay down the mortgage as far as you can while keeping a reserve against emergencies of around $10k. Tax deduction talk here is nonsense. In the 25% bracket the after tax cost of 6.75% is 5.063% which is more that you are getting on those savings after taxes now I bet. Future savings after mortage paid off has to go to investements in stcoks/etfs/mutaul afunds. You have no choice at this late date. schwab.com shows the options clearly. Feel free to contact via answers if further qs.

Answer 6

This is really a question for your income tax accountant. Generally, there is no benefit in paying mortgage interest. However, with a rental property, all expenses are deductible.
With a mutual fund of growth stocks, you should be able to average a 10% return over the long run...at least 5 or six years.
It looks to me like you would be better off investing the money.

Answer 7

Invest the $40k. I made 18% last year on my 401k. Then claim a tax deduction on the interest on the $30k loan.

Answer 8

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Answer 9

IF I WAS IN YOUR SITUATION I WOULD PAY OFF THE HOUSE. AND PUT THE REST INTO A ROTH IRA OR SMITH & BARNEY (CITIGROUP). CHECK OUT THEIR PROGRAMS. ALOT OF THE PROGRAMS ARE DOING GREAT. JUST HAVE TO TALK TO THEM TO SEE WHAT'S DOING GOOD/BAD. WE'RE IN A CUSTODIAL IRA AND IT'S DOING PRETTY GOOD.