Extra cash--where to?

[kork13]

[WARNING -- LONG POST -- Sorry, I'm thinking out loud, and tend to be verbose when I do so]
I'm trying to think through my options here regarding our houses, so I figured I would lay everything out & open it up for everyone's opinions.

Background: My wife & I are both currently active duty Air Force officers, considering our options for potentially both transitioning to the National Guard, most likely either here in AK or in WA -- if we take the plunge & do it (call it a 70% chance), that would happen in late 2019. In any case, that is when our current assignment ends, so it's either National Guard or a PCS to another active duty location.

We own 2 homes:
A) Rental house in Oklahoma, currently rented slightly below market at $1400/mo (leased thru Jun'18), $93k mortgage remaining @ 2.75%, 15-yr fixed, $1200/mo PITI, purchased in Sep 2012 for $177k, currently worth ~$190k. Plan is to keep this rental for the foreseeable future.
B) Current home in Alaska, purchased in Sep 2016 for $415k, 323k mortgage remaining @ 2.375%, 15-yr fixed, $2800/mo PITI. If/when we move away from Alaska, we would likely try to turn it into a rental as well...market rent would likely be around $2600/mo.
We aren't trying to make a killing off of rental properties...we just feel that they're a good option as a secondary source of wealth building.

Next week I'm going to have a lump sum of $20k available to me. $9k will pay off the loan on my wife's car (no other non-mortgage debt), and $1k is tagged for general savings. From there I'll have $10k on hand, plus $1600/mo freed up due to no car payment & finally getting our EF back to the full 6 months' expenses (it was low due to the 1.5x-2x higher COL in Alaska).

I need to decide on what to do with this $10k and the $1600/mo. Current options I'm considering:
1) Put everything as extra principle toward the rental mortgage. If I do, I could have it 100% paid off within about 2.5 years, right before our assignment here ends, at which point our expenses on it would drop by ~$900/mo, and we'd be getting almost pure income from the house.
2) Put everything toward the mortgage on our current home. While it was necessary (homes are outrageously expensive up here), a $320k mortgage is kinda daunting. Over the same 2.5 yrs, I could have it paid down to ~$200k. My thinking is that by knocking this mortgage down so much, if/when we go to rent this house, I could recast the mortgage in order to keep our fantastically low rate, but we could lower our monthly expenses by almost $600/mo, giving us positive cash-flow on the house as a rental.
3) Invest it....somehow... I know that, by the numbers, this would likely the best option. But for investments to do better than a mortgage payoff, it would mean assuming investment risks (rising interest rates & stock market fluctuations) that I'm not sure I want to accept with this money, knowing that I'd likely want it for either making a big payment on one of the mortgages later on, or buying a new house wherever we move to next.

I was originally leaning toward paying off the current rental (#1), but as I thought about it, paying down the current house (#2) will probably put us in a much better place when it comes time to leave Alaska & make this house a rental, given the recast option to reduce our monthly expenses.

I know there are a few real estate investors here on the forums, so I welcome your thoughts. I know the houses aren't well-leveraged (due to the 15 yr mortgages) & thus not capable of producing the cash flow that they could. But as I said, our driving interest is more in wealth-building more than income-producing. Yes, the latter leads to the former, but we are simply not comfortable being heavily leveraged for the sake of making a buck.

Thanks for reading & for any comments!

[MonkeyMama]

I'd personally lean towards #2. Before you even mentioned your considered options, that mortgage (versus rental income) really stuck out.

I also presume, from past discussions, that you have a fair amount invested. If you had very little in investments, I'd probably recommend more diversification. But I don't get the sense that is the situation.

If unsure or that doesn't feel right, send the money to some combo of the options. Just a reminder that it doesn't have to be all or nothing.

[bigdaddybus]

If it were me I would go with #1, sell #2 when you return to the lower 48 and at that time look to add another rental or two closer to where ever you serve in the Nat Guard.

[kork13]

I'd personally lean towards #2. Before you even mentioned your considered options, that mortgage (versus rental income) really stuck out.

As I said, I was initially leaning toward #1.... Until I actually looked into the numbers of renting our current house, which totally shifted my thought process. So yeah, that really caught my attention as well.

I also presume, from past discussions, that you have a fair amount invested. If you had very little in investments, I'd probably recommend more diversification. But I don't get the sense that is the situation.

Yes, we are still investing 10% of our income in a taxable account, saving another 12% in cash savings, and 20% for retirement. This "spare" $1600/mo that I have to play with is about 8% of our income.
With that said, this IS still part of my concern. When we bought our current house, we drained most of our taxable investments for a 20% DP. So those are now down to ~$17k. Our ongoing investments should raise that up to ~$70k by the time we're looking at change again, which would be enough for a good DP again, but which would, again, drain us.

If unsure or that doesn't feel right, send the money to some combo of the options. Just a reminder that it doesn't have to be all or nothing.

I think I'm struggling to answer this bit for myself... As I said above, we do have alot already being saved elsewhere (40-50% of income), so I know that I am "spreading the love" as it were... Honestly, with the COL adjustment we got living here in Alaska, the numbers are just so much higher than I'm used to.... $220k income, $415k house & $320k mortgage, and so on... Neither of us grew up in wealthy families, so the scale of all this is a bit shocking/overwhelming. So I think I'm just doubting myself & nervous to be making such significant moves with such significant amounts of money.

[MonkeyMama]

Our ongoing investments should raise that up to ~$70k by the time we're looking at change again, which would be enough for a good DP again, but which would, again, drain us.

In that case, I think it would be wise to re-direct the money (at least some) towards down payment and reserves. I think flexibility would probably be *the* most important when you move. & I would err on having a bigger down payment and reserves to that end. Ideally it would give you more options when you move. It doesn't sound like you'd have to redirect too much to have a bit of an extra cushion.

Honestly, with the COL adjustment we got living here in Alaska, the numbers are just so much higher than I'm used to.... $220k income, $415k house & $320k mortgage, and so on... Neither of us grew up in wealthy families, so the scale of all this is a bit shocking/overwhelming. So I think I'm just doubting myself & nervous to be making such significant moves with such significant amounts of money.

I grew up in San Francisco. We have never had a mortgage larger than $230k. The $300k+ mortgage sounds completely insane to me. (Though I grew up in a city with a $600k median housing cost, and we did buy our first home there. All we could afford reasonably was a condo). Just to say, just because you live somewhere with insane cost of housing doesn't mean you ever get used to it or feel more comfortable with it. You just recognize that it's insane. I wouldn't discount those feelings.

[kork13]

If it were me I would go with #1, sell #2 when you return to the lower 48 and at that time look to add another rental or two closer to where ever you serve in the Nat Guard.

I am considering the option of selling the current house, but I'm concerned that selling after just 3 years wouldn't give us enough time for the house to appreciate & offset the cost of selling. Seller closing costs up here are about $20k-$30k. That was another part of the reason we wanted to rent the previous house, and strongly consider renting our current house.

[LivingAlmostLarge]

I'd also stash the cash and sell rental and primary and buy where you end up. That way you can be much more selective and picky. Maybe a multi family or commercial property with all the cash

[kork13]

In that case, I think it would be wise to re-direct the money (at least some) towards down payment and reserves. I think flexibility would probably be *the* most important when you move. & I would err on having a bigger down payment and reserves to that end. Ideally it would give you more options when you move. It doesn't sound like you'd have to redirect too much to have a bit of an extra cushion.

Very true. Perhaps it would make sense to take the initial $10k that I'll have on hand and add that to my taxable investments. Between that and the cash savings, I think that should give me a decent buffer. That idea is a bit more comforting as well, so I think that may end up being my solution.... Invest the $10k lump sum, then go with option #2 to aggressively pay down our current house.

The follow on question becomes: what should I invest it in? I don't want to open myself up too much risk, knowing that it's potentially going to be needed closer to the short term... but I don't want to let it languish in a savings account/CD earning almost nothing in the interim, in the event that I don't end up needing it yet. I'm leaning toward either a balanced fund of some sort, or a short to intermediate duration bond fund... Hesitation there is just knowing that interest rate increases are likely on the horizon. I-bonds would be a decent option, but I'm already planning to send the remainder of the EF into that. .....sigh..... I wish CD rates were better.

[MonkeyMama]

The follow on question becomes: what should I invest it in? I don't want to open myself up too much risk, knowing that it's potentially going to be needed closer to the short term... but I don't want to let it languish in a savings account/CD earning almost nothing in the interim, in the event that I don't end up needing it yet. I'm leaning toward either a balanced fund of some sort, or a short to intermediate duration bond fund... Hesitation there is just knowing that interest rate increases are likely on the horizon. I-bonds would be a decent option, but I'm already planning to send the remainder of the EF into that. .....sigh..... I wish CD rates were better.

Personally, I go with balanced funds for the more "short term" investments (that I don't 100% need sooner). But I think you just have to go with what you feel comfortable with. We don't have a lot of options in this current interest rate environment.

P.S. For money I likely needed in 2.5 years, I'd personally just put it in cash.

[Jluke]

You have 10k and 1600/month for 2.5 years... that is a total of 58,000.

Option 2 was 323k mortgage down to about 200k in 2.5 years. I'm guessing you have more $$ to throw at this loan since that is a difference of 120k. You did mention a recast of your mortgage at a lower balance, but if rates are higher I wonder if lending companies will be as eager to recast a mortgage.

If you aren't selling either home when you might relocate to a different location, you'll need to tap into your investment account again.

Since 2.5 years is a short period of time, I'd go the conservative route and keep the money in cash, not pay extra (or too much extra) on any one property. Closer to the end of 2.5 years, you'll have a better idea of what your future path is and then you'll have the money where you can lump sum it to a mortgage, or lump sum it to an investment, or lump sum it to another down payment.

I would look at this as a cash hoarding phase for your next move.