I have an opportunity to buy 2 homes at $200K each cash or pay down my mortgage $400K. Interest rate is 3% with $800K currently owed. Rental income will be $16K per home net per year. I know rental income would be good for long term cash flow, but paying down the mortgage will save me a lot of interest payments and give me some financial security. I do have time to manage the properties but would rather get a company to handle the headaches. I have never rented before and am eager learn, good or bad, from the experience. Which choice is boglehead worthy?
They're both okay, but given that we're currently in a seller's market for real estate, and stocks and bonds seem pretty richly valued, I might lean toward paying down debt right now. 2-4 years ago.....buy the properties. You probably would have gotten them for $30K for both.
When you're not sure what to do, why not split the difference? Pay the mortgage down $200K and buy a property or two with the other $200K
One other thing to keep in mind is that interest rates are at an all time low. You might be able to pay down your mortgage to get below the jumbo limit and get a really sweet rate on a 15 year right now, like 2.5%. Otherwise it's pretty hard to get excited about paying off a 3% deductible loan especially at what I assume to be a pretty high bracket.
I'd read some of John T Reed's real estate books before purchasing rental property. If he can't talk you out of it, no one can. He's more sour on the experience than Bogleheads in general. (But at least you'll go in with eyes wide open.)