Unique investment strategy - Need some opinions

[Nik Moushon]

I am under contract for me first...investment (I'm not going to call it a rental and you'll see why). Its a 5 bed/3bath, 2300 (+basement) SFH on .48 ac and is across the street from the hospital in a nice part of town. My original intent is to move into this house and turn my current home into my first rental. Its a 3 bed/ 1.5 bath, 1200 sf, on .25 ac and in the best school district in town. I am targeting $2000/m for rent. The reason I am choosing to move is that I would then split the large lot into two and build a duplex. With being literally right next door I would then have a much easier time doing as much of the build myself as possible. Though I would still hire out most of the build because I work a full time job but most of the finishes and easy stuff I will do myself at night and on weekends. With having a 3 yr old and 3 month old this would be ideal for helping out my wife when she really needs it (having the construction site 100 ft from the house). Now on to what I need opinions on...

I asked my realtor what she thought I could rent my current house for and she came back with 1700/m...I knew my 2000/m was probably on the higher end but not by this much. With 2b/2b, 900 sf apt going for 1500-1600/m I would not think a nice house like mine would only be 100/m more.  I know I can always just test the market and put it up for rent and see what happens. We were planning on having it rentable on June 1, so there a little bit of time to test the price. But at this price, 1700/m, it doesnt make sense for us to move. We were prepared to pay a little extra every month in mortgage for both the ease of construction and an improvement in the house we live in but a little extra turned into a lot extra and now we are not sure if its worth it. We are going to split the lot and keep the land to build. That is set in stone.

Option 1 -  I put in a 2 month holding time to let me split the lot. So I could put the house back on the market after that, though I would take a decent size "loss". I think I could possibly put it back on the market for the price I paid (420k) and let the buyers negotiate me down from there, which I'm willing to do since I cut the lot in half. The market here is crazy enough that this will probably work. Plus closing costs and realtor fees means I would "lose" about 35-40k. I put quotes are "lose" because I'm technically losing money on the deal but I'm not out any extra cash. The "loss" from this would just mean I am left with a 35-40k mortgage on my .25 ac lots that has a value of about $120-150k (bc of location and zoning). This is my wifes favorite option. She is MUCH less risk averse than I am. She would rather cut our losses now so we could focus solely on the build. Which I can see her point here.

Option 2 - Rent the house. The mortgage is about $2600/m (havent finalized numbers with insurances but its close). Rent would only be somewhere in between $2200-2500/m. So we could be losing between $100-400/m (just on mortgage not including cap-ex or anything like that). The appreciation the last 2 years here has been 12% & 13%. I did numbers, with a comparatively conservative 10% appreciation, after 1 year we would break even, best case numbers, between rent and appreciation and worst case numbers being we are still out about $10k or so. After two years of appreciation we would easily be in the black. This is with overall value not month cash flow btw. This is not a long term rental for us. We would almost assuredly sell after 2 years at this point. With out a large DP on this house the numbers just dont work out well as a rental. This is one reason I'm not as concerned with monthly cash flow for THIS HOUSE. The other thing is the house was built in 1926 with very out dated kitchen & baths. Kitchen is from the 70s (maybe 80s) and the bath looks like the 50s. No lead piping and I'm getting the last bit of K&T wiring disconnected before closing (90% of it has already been disconnected with modern elec put in). HVAC is on its last leg, though still working (getting it inspected this week). Roof has 7-10 years left. These things make me nervous to hold to it for two years and they could all possibly need replacing and if they dont end up getting replaced just make it a bit harder to sell with them in place (even if they all technically still work or still good condition). Basically the possibility of Cap-Ex coming t haunt me after two years which would mean I could still possibly only break even or even lose money. And of course the market turning could change things too. As you can see, my risk averse wife, does not like this idea at all and I tend to agree with her. But part of still want to hold on to the possibility of after two years turning my $20k DP into about $40k just by sitting on the house. 

Option 3 - Still move to the new house, as originally planned, but just eat the extra cost. We would be paying a difference of about $800/m more in mortgage, that includes renting our current house at the lower rent. Hopefully build the duplex with-in a year and then sell the house. I found it hard to try and run numbers on how much I could save by doing some of the construction work myself. The allure of being so close to the construction site and the ease of being able to go back and forth is what really is pulling me towards this option. But I dont know if its worth it considering how much I would be "losing" every month. I do have construction experience, outside of being an architect as my day job, so i know i could do good work and for cheap. Just not sure if it will end up being worth it. 

Please note that I am new to the investment side of real estate so take it easy on me if I'm looking at something wrong or not considering something. But I'm open to opinions and suggestion. Sorry this got more long winded that I was first thinking. Thanks in advance for the help everyone.

@Steve Vaughan, tagging you since you know the house I'm talking about.