@Steven Bays
Hey Steven,
First of all, congratulations on the upcoming wedding!
I did a bit of number crunching based on the figures you gave and in my opinion, the duplex is your friend.
For a quick analysis with the 50% rule, the best way to look at the numbers is to simply ignore the fact that you live there. First, if you hold the property long term, chances are you won't live there for the bulk of those years, and second, the rent you don't receive from your side cancels with the rent/mortgage you are not paying were your primary residence separate.
Based on you saying that your interest is 4716, it sounds like you did this with a zero or verysmall downpayment. So it makes it hard to calculate a meaningful percentage return.
Anyway, using the 50% rule, I get:
Gross rent: 15600 (gross rent is your maximum theoretical rent if there were no vacancies)
Expenses @50%: 7800 (this includes all expenses except P&I: rent not received due to vacancy, insurance, taxes, maintenance, set aside for long term capital expenses such as replacing roof, property management, and so and so forth).
Gross rent minus the expenses above is called your net operating income (NOI), which is 7800 in your case.
From that, you subtract your debt service, which is the P&I portion of your mortgage payment, which if I filled in the blanks correctly should be about 557/month, or 6685/year. Does that sound right? If so, this leaves you with 93/mo (1115/year), which is your cash flow.
By the way, the reason the debt service is separated from the other expenses like this, is so that you can look at the performance of the property separate from the specific financing that an individual investor worked out.
There is another consideration which is that some of your P&I is going to pay your principle down. Even though you don't get to see it unless you sell, that is your equity, so you should consider that in the numbers. Factor that in, and it bumps the income from the property to 307/mo, or 3678/yr.
On to a couple of things more specific to your situation.
First of all, are you managing the rented side yourself, or using a management company? The 50% rule includes management in the expenses. I wouldn't recommend buying a property without running the numbers with management included (even if you initially plan to self-manage, things can change over the long haul). But since you already own the property, we should rerun the numbers w/o management (if this is indeed the case) to see where things stand for the immediate term. Without management expenses, the 50% becomes more like 40%. So your cash flow jumps to 223/mo or 2675/year, and when you factor in the principle reduction from paying your mortgage, you are now at 436/mo or 5238/yr.
While you are living there, there is another factor in your favor: the 50% rule includes vacancy in the expenses. A decent rule of thumb for estimating the vacancy component of the 50% is 8.33% (one month out of 12). This varies depending on property type amd area, but I think 8.33% is a reasonable estimate for a duplex without knowing anything else about your property/market. So, since you are technically your own tenant, you can half the vacancy estimate since you're unlikely to move out in the middle of the night without telling yourself ;). For the short term, while you are living there and managing the property yourself (I'm guessing), 36% is probably a better estimate of expenses than 50%. Taking that number, your cash flow works out to something like 275/mo (3299/yr), and your full return including the principle reduction is something like 489/mo (5862/yr).
One other thing – does your tenant pay their own utilities, or do you? The 50% rule does not include owner paid utilities, so you would have to add back an estimate of their half of the utilities into the expenses if you are paying them.
Bases on what you've told us (and especially if the tenant is paying their own utilities), it seems like the duplex is helping you quite a bit. I'd hang on to it.
The other reason I'd be hesitant to sell is that unless you have a lot of equity, then the closing costs are going to eat up all the equity you've been building up (and maybe more). As the seller, you pay both agents commission which usually totals 6% of the sale price, and that's before you get into things like seller concessions, home warranty, and all the other junk on the seller side. Real estate isn't really that liquid.
Hope this helps. Good luck!
-Harry
