If you don't want to keep the house, I would hesitate to pre-pay the mortgage. Why tie that money up?

I'd give yourself a good emergency fund for each rental (six months' expenses is what I've heard), beef up your personal emergency fund, and then sock the rest of it into that car fund you mentioned.

As far as targeting savings goes, we find ING Direct insanely easy. We have several targeted savings accounts there (sub-accounts under one account number), individually labeled, all earning the same percent, and we automatically transfer money into them each month. Doing this, we've saved for down payments, cars, emergencies, vacations, college -- you name it. It's been great.

Good luck!