Investing for equity

[Gerald Wallace]

There is a 4 bed room 2 bath home that I am looking at purchasing. It is set up like a duplex as there are 2br/1 bath on each floor. My costs after mortgage/ insurance/taxes  would be 2,987.18$ per month with a 7.125% rate. The downstairs market rent for 2 bed 1 bath with utilities included is 1400$. I currently am living in a single family home that would rent for 1800-2000$ a month if I chose to rent it long term. This mortgage is 1250$ with insurance/taxes.

My logic for buying the duplex is that I would move into the top portion. By doing this I will net 550$ a month from my current primary home being rented and 1400$ for the downstairs portion of the new home. 

Instead of paying 1250$ a month and staying in my current home I can pay 977$ per month and have an additional 4br/2 bath property. 

Negatives of this purchase: home does not cash flow or break even if I decide to move out of the top portion. The top would rent for 1600$ a month not including utilities. The net of both units rented would be 2700$. I would lose 300$ a month if I chose to move to another home. 

My exit strategy is to hold the home 2-5 years and to purchase another home with the new equity I would have achieved by renting the bottom portion and with market appreciation. Of course as well to benefit from the tax benefits of the sale as this would be my primary residence. I would love to keep it as a rental but at this time I think it would take too long for the rent values to increase enough to make sense 

Worst case scenario is I have to hold the home for an extended period if the market decreases short term. In this case I would lose some money each month. 

Looking for other people’s opinions. I am essentially house hacking for equity. It should be noted that this is a coastal town with a high appreciation rate. 

Thank you for read!

[Nathan Gesner]

Quote from @Gerald Wallace:

1. Your current home would rent for $1800 and PITI (principal, interest, taxes, and insurance) is $1250. That's not a "net profit" of $550/month because you haven't accounted for vacancy, maintenance, capex, or other expenses. If you sit empty for one month, you lose $1250 for PITI, plus utilities and any other expenses. That's about three months worth of cash flow out the window. Get one bad tenant and you could lose three years worth of cash flow very easily.

2. If you rent out the downstairs for $1400, you will essentially pay $1,600 for the upstairs apartment. Then add the average of 10% ($300) for maintenance. Assuming everything else is perfect, you still pay $1900 for an upstairs 2/1. That's $650 more per month than you pay for your current home. Where's that money coming from?

I think I could address more, but it's unnecessary. Even in a perfect world with no maintenance and no vacancy, you would pay $700/month or more in the hopes of gaining equity. That's a gamble.