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Question for the Money Doctors

Question submitted on Jun 4, 2012.

Question

I recently got an inheritance from my parents. Should I invest, put the money on my mortgage, buy a small rental property, or split the money between investing and mortgage payment?

Answer

As with many questions, the answer is "it depends."  Not knowing the details of your financial situation I would start to answer your question by going through the following thought prcoess.....1) is there a need to keep some/all of the inheritance as a cash reserve for emergency needs? 2) if you can invest this money for the long term, is it reasonable to think you can earn more from the investment than the interest rate on your mortgage?  Remember to consider any income tax benefit you derive from your mortgage payment in making this comparison.  While you're looking at your mortgage, also consider whether or not a refinance makes sense given where interest rates are currently.  3) The discussion around possible purchase of a rental property probably requires a longer discussion...where would you buy?  How much rental income could it generate versus the costs involved?  What is the prospect for appreciation of the property over time?  Would you handle the maintenance or hire a property manager? 

Having said all of that, many people prefer to pay off or pay down a mortgage since that provides a "sure" return on their investment, i.e., saving mortgage interest.  Investing the money in rental property or anything else generally involves an uncertain return.

Good luck.


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