​Debt or Leverage of Low interest,what is best plan before retire

[Jil Tin]

Debt or Leverage of Low interest, what is best plan before retirement?

we live in California, have primary home and a rental home.

I have 530k balance primary home first mortgage locked 3.5% for 30 years (PITI=$3263), 100k heloc balance rate 3% interest only ($600/monthly) and rental first mortgage 299k balance at 4.25% for 30 years, rent is $3000/month.

Since we are living at San Jose, property tax and income tax puts us in AMT bracket with 33% IRS tax, 9.3% CA tax.

I am getting around 50k savings every year as bonus, dividend etc. This is the maximum possible extra savings per year after fully using 401k plans.

We are around 55-56 aged, counting maximum another 10 years of work. It can be down to 6 years until we hit 62 age.

Considering this, worst case 6 next years, little confused how to allocate $50k every year, whether to pay rental mortgage or Heloc or invest in Mutual or ETF funds.

If I pay $50k every year to rental mortgage,fully closed rental loan before retirement, I can get the rent $3000 as my free income. I save $2000 after expenses that will be washed off by depreciation loss. Eventually, when I am retired, I will get $2000 extra cash nontaxable (yes, depreciation will take care for at least 15 years).

If I pay 100k heloc, I may have some emergency cash to withdraw when required, but reduces my tax deduction at 43% level. Balance 200k I can pay in rental, but still leaves 100k on rental debt.

We can extend retirement further two years, but we do not know our situation at that age, would not like to count what we earn through work beyond 62. It will be extra bonus for us.

If I invest in Mutual funds/etf, the likely return is between 10% and 15% (S&P growth), but has risk as ROI is not guaranteed.

I do not plan to sell my current home as I plan to stay after retirement too. This is the best house for us, but would like to pay it slowly taking MIRD benefit. At the age of 62, if we retire, both of us will be getting 40k (20k+20K) social security and 50k (25k+25k) from 401k (taxable). This is enough for us to live including primary mortgage payment.

We are really confused what our best option is. We want to aggressively get out of debt before retirement. 

[David Faulkner]

I have to respectfully disagree with looking to buy rentals in the Midwest. I have nothing against the Midwest, or any other market for that matter, and I'm sure many locals do just fine investing there. However, take a person with somewhat limited REI experience, money to spend, and absolutely no familiarity with an out of state market thousands of miles away and absolutely no personal or professional connections there, and asking them to put all their money and trust into the hands of Real Estate Agents, Contractors, and Property Managers whom she has zero experience working with sounds very risky to me.

At this stage in the RE cycle, I'd pay off or refinance out of the HELOC to get rid of a variable interest rate, educate myself and look for great deals locally (which you won't likely find given the state of the market, but you'll learn a lot by searching), and build my war chest up. Be greedy when others are fearful and fearful when others are greedy ... right now in San Jose and many other RE markets, people are acting greedy, so caution is advised.