Partially owner occupied MF analysis to start investing in RE

[Michael R.]

I'd like to bounce this question off the forum. I'm thinking about leaving my $1,700 per month studio in Manhattan to live almost rent free in the immediate suburbs. The house in question is on for $435,000, 1,750 sq ft, 2 units (one 2 br & one 1br), $12,400 taxes, $2,500 insurance, no immediate work needed (house is completely updated) but estimating annual maintenance at .75 - 1% of sales price. The house will be mortgaged 50% and I will live in the smaller unit and rent the other out for atleast 2,200 per month (area is very desirable and units are rented within 3 weeks). That is approx $2,700 in monthly mortgage, insurance, property tax, and estimated maintenance cost, meaning I will only need to pay $500 per month. If I were to move out in 5 yrs and rent both units(smaller unit will rent for $1,400), the return on the down payment is a little over 5% and the cash on cash return is 3.9% with the mortgage and 10% after the mortgage is paid off with a post mortgage net cash flow of 23,000 annually (assumes 5% vacancy). From a pure investment standpoint this is a mediocre return with the mortgage, however the upsides are:

- I can save money as I will have an extra $1200 per month ($1,700 current rent - $500)

- I will avoid the current NYC income tax of 4% on my salary

-Benefits of mortgage tax deduction

-I can take a loan on the property to put 50% down on a $200k multi unit home in a college area nearby (pure investment property)

QUESTION; is this a good starter property given the low cash flow and mediocre return? Do the benefits outweigh the lower return or should I look for a 3 unit house ? Advice? Thanks all!

[Jake Kellerhals]

I agree with @Jeff Arndt , why are you putting so much cash in? That's why your returns are so low. With interest rates being as low as they are, you're much better off financing as much as you can from a pure numbers standpoint. The flip side is the security of a smaller payment and less risk, but you should be able to find a happy medium. Run your numbers at 20, 25 and 30% down and see what that does for your return. Also factor in what you can do with the additional cash, perhaps buy another investment property somewhere else and REALLY increase your profit.