prepay mortgage vs investment property vs mutual fund

[cospringsgal]

We've got about 50K liquid that is doing nothing, and are having a hard time deciding what to do with it:

1) prepaying our mortgage
2) investing in a rental
3) investing in a mutual fund

we owe about $160 on a $350K house at 3.25% year 14/15 , and we plan to stay put here for at least 10-15 years. We both take home $50K, but trying for baby #2 which means that I might take a year of two off. We live in a great rental market (military town), but am worried about being over leveraged in real estate if we buy another house. We're considering an index fund (something like the vanguard total stock market index) as an investment, but with the economy the way it is wondering if it would be better to just pay down the house? Then again with me being out of work for 2 years, a rental would be creating income unlike the other two?

Any suggestions or advice?
Help!!

[arebelspy]

A rental largely depends on your propensity for being a landlord and dealing with potential hassles.

That's what you need to figure out first.

After that it's a comfort/preference thing.  I personally would rather invest than pay down a tax-deductible 3.25% loan, but YMMV.

You need to discuss with your partner asset allocation, risk tolerance, and investing preferences.

[cospringsgal]

A rental largely depends on your propensity for being a landlord and dealing with potential hassles.

I agree, paying down the house is the most conservative choice. We're probably only considering it because we're not sure between the other two options.

Rental vs index investing, are they basically yielding the same returns long term?

Husband is handy and I'm good at planning and design (heh) and we remodeled and sold the previous house for a profit. So I wouldn't mind the hassle too much. It IS a hassle though, and I'm wondering if it's worth bothering with it, if we can just index instead. I guess I am concerned that the economy could crap out even more, however if that happens the housing market will not be far behind, huh...

[Sparafusile]

Could you not hedge your bet, split the money, and invest in both? $25k is enough for a down payment on a $125k house. $25k is also enough to get you access to Vanguard's "Admiral" shares which have reduced fees. You could even roll the profits from both into paying down your primary house's mortgage if you wanted to hit all three options.

[cospringsgal]

Could you not hedge your bet, split the money, and invest in both? $25k is enough for a down payment on a $125k house. $25k is also enough to get you access to Vanguard's "Admiral" shares which have reduced fees. You could even roll the profits from both into paying down your primary house's mortgage if you wanted to hit all three options.

Ahh, the wonderful Indiana real estate market! I would be a slumlord here in that price range, with very "high maintenance" tenants. It would have to be about a $250K house here, to be in a decent (not great) school district and neighborhood, so we could sleep at night.

I do like your suggestions about doing a bit of everything though. I think it would give the conservative me some peace of mind, while still making the money work for us. Since we bank my salary, in a year or so we will have the same amount, and could continue to diversify.

A question about the investing bit:
is it best to do it in one large swoop to get the lower Admiral costs or to DCA over a year or so?

[mechanic baird]

A question about the investing bit:
is it best to do it in one large swoop to get the lower Admiral costs or to DCA over a year or so?

Admiral share cost only $10K to qualify for most funds.

Also, if you have vanguard account, ask for a brokerage account. Then, you can just trade Vanguard ETFs, the fees are comparable to the admiral shares without minimal requirements. And there is no brokerage fees for Vanguard  ETFs. VOO is just like Index 500 fund.. My favorite is VYM that pays pretty decent dividend.

Wait a few weeks or a month or two until Dow corrects down to 12500 ish though.. It's flying high right now and may not be a good entry point for such a large sum of money. Or, you can divide up $25K into a few slots and invest them gradually

[cospringsgal]

Admiral share cost only $10K to qualify for most funds.

Also, if you have vanguard account, ask for a brokerage account. Then, you can just trade Vanguard ETFs, the fees are comparable to the admiral shares without minimal requirements. And there is no brokerage fees for Vanguard  ETFs. VOO is just like Index 500 fund.. My favorite is VYM that pays pretty decent dividend.

Wait a few weeks or a month or two until Dow corrects down to 12500 ish though.. It's flying high right now and may not be a good entry point for such a large sum of money. Or, you can divide up $25K into a few slots and invest them gradually

Thanks for the info. Going to head over to the investing section and read up. I'm an investing newb, and not ready to actively manage anything, that is why I was gravitating more towards the plain index funds. It's something I can comprehend..

[arebelspy]

Rental vs index investing, are they basically yielding the same returns long term?

Hah.

When my crystal ball is back from the shop, I'll let you know.  ;)

[mechanic baird]

Rental vs index investing, are they basically yielding the same returns long term?

Hah.

When my crystal ball is back from the shop, I'll let you know.  ;)

Just gonna give you a live example so you can weight in yourself..
Our rental has a 6.3% return on the money, annually.
As our rental market is heating up, we plan on raising rent which gives about 0.4% more on return each year.
We purchased the unit in 2004,so it has only appreciated 7.7% in 8 years on price.

Now let's look at the S&P index. S&P has appreciated around 24% in one year, 28% in 2 years and -3% in 5 years. If dated back to 2004, the same time when we bought our condo, it has appreciated 27.81%. That shows you the housing market definitely took a huge beaten comparing to the stock market. The same time, the S&P dividend yield has been around 2-3% only for the last 8 years..

So here is the thing, from pure income perspective, rental definitely beats index assuming your mortgage comparing to rent you collect is very small. Or even better, pay cash for the rental.
However, from capital appreciation perspective, we will need a crystal ball... If you bet the housing price will outpace stock market, you should go with rental unit. If you are betting on high flying stock market and a depressed recovery in housing market, then you should bet on index fund...