2 Unit Multi Family to Live Rent Free. Good idea or not?

[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!