Baby steps... 2 options and I was wondering what YOU would do?

[Tammy Laverty]

So I'm looking into 2 options, one owner occupied, the other isn't. We are looking to buy our first investment property, and we do not have deep pockets, so this is ground level for us ;) I'm trying to make a stable first step, so that we can build from there. What do you think?

 house a) beautiful, wide tree-lined street with big, established houses, drs/lawyers and executives as neighbors...quiet street very close to a hot downtown area, highly desirable area near great restaurants, walk to riverfront parks, walk to train to NYC.

*this house is a retirement investment. We LOVE this town. Would retire there some day (I am 36, so thinking down the road).. it only has a 1.2 % cap rate though. There is a completely separate, adorable 2 bedroom cottage behind the larger house. We would rent the larger house and cover the mortgage 100%, living close to everything for next to nothing. Perhaps, once we have other properties bringing in income, we would switch and move to the main house (the cottage would pay a good chunk of the mortgage), but maybe not. Options are nice though! :)

house b) This is definitely not a neighborhood we would live in. It isn't an urban wasteland, but it is definitely on the lower income suburban side of things. 3 units, 3.4% cap. We would just keep our current home in this situation. Not sexy, but solid. It would cover its mortgage, and give us about $800 free and clear every month (after deducting for vacancy and repairs) to cover half of our home's mortgage.  So not mortgage free, but it would still help.

This is purely an exercise in thought process. Given that we are looking to eliminate our mortgage to free up cash for saving toward our next place, house a seems good, but its cap rate isn't as good as the other. However, should I be thinking of cap rates in this way when our first goal is offsetting our mortgage? Thanks for your advice! I'm so excited about our first baby steps