Pay large sum to mortgage/student loan or add 3rd unit and rent?

[Shane Evans]

Hi everyone,

I've been following along on this forum for quite some time and this is my first post. Thank you for your time. 

I bought a 2 family home in November of 2015 and live in one unit. (First time home buyer) after months of settling in and updating the rental apt, we just put a tenant in the second unit this month. (10 months between purchase and rent income) we are getting $1300 per month for the 1 bedroom. We pay for heat and water. Our mortgage is $2300 per month. Utilities around $150. Mortgage is 219k@ 4% interest, we pay 120$ in PMI within the 2300.

Our student and car loans are around 100k@ an average of 5% interest, with a monthly payment of 1400. 

My question to you all is what would you do with the following situation. 

We have 35k in savings. (20k of which is from an estate) We were told, to our surprise, by the town housing department that we have a 3rd unit registered. The home has an large unfinished space that is set up to be the 3rd unit. 

Should we drop the 20k into the 3rd unit or should we put it toward the mortgage/loans? I'm guessing we can get about 1300$ or more for this space as well and we would only pay for water. 

Thanks for your time and input!

Shane