Developing an Exit Strategy for Owner Occupied Duplex

[Trevor J Dammon]

Hi all,

I am going to be moving to a larger city next year and want to start on my real estate journey. My plan is to buy a duplex, live in half, and rent the other half.  My wife is currently a medical resident and in 4 years she will be a doctor, at which time our household income will likely go from 220k to around 400k.  Some time within a couple years of this we will be looking to move out and get our own place.  From my research duplexes in the city tend to have a cap rate around 8%. An average property value in the area I am looking is around 550k and monthly rents would be around 2k.  

When I start looking at annualized rates of return I notice that around year 5 I have my best returns. The rate of return looks like it drops slowly until year 20 where the rate drops quite sharply.  Once the mortgage is paid off assuming that the ratio of rent to property value remains constant my annualized rate of return should be around 4% (half the cap rate) assuming half of rent goes to repairs and maintenance and other expenses.  4% is below what I could get if I just sold the property and stuck the money is a mutual fund.

So what I am trying to figure out is the pros and cons of selling at different times. 

I think I can use a property value to obtain another loan so this may be a reason to keep something even if the rate of return is low. But at the same time if the property is worth 500K couldn't I sell it and get 5 loans for 5 new properties with 20% down.  I'm a total newbie when it comes to loans so I don't know how realistic this is.  

On the other hand looking at the math it makes sense that I should sell my property when the next years annualized return (not cumulative) is projected to be lower than the first year annualized return on another property.

Any help would be appreciated.