Okay so I did some research. The house is $370K, $320 of that would be the loan. So it looks like on month 1, about $480 is principal.

And from the amortization schedule it looks like I fairly accurately estimated the mortgage interest at close to $12,000 during the first year.

I did not realize that the mortgage interest deduction is offset by the standard deduction, that significantly impacts the calculation. I also have the opportunity to pay extra the first year until I have gotten to 20% equity and then I can drop the PMI.

I do have the option of potentially renting out a room in the front house also to cover more of the mortgage.

Re: counting the rent as income, is that right? I am thinking about it, it seems like if the backhouse was truly a rental income property, I shouldn't deduct whatever value it is worth as a mortgage interest payment since I don't occupy the place. So I would lose money on the mortgage interest deduction. On the other hand, if it's truly an income property, the $800/month shouldn't really count as income because it would be offset by the cost of the property to me, i.e., the mortgage payment on it. I'm not exactly sure how that would work...

If I add in equity as the W variable, I get this:

Costs:

$2000 (PITI)

$210 (opportunity cost of down payment)

$X (Repair budget)

$Y (Renter's utilities)

TOTAL: $2210 + X + Y

Contribution to Net Worth:

$760 (Rent, less 5% for vacancy)

$292 (Tax benefits)

$Z (anticipated appreciation) (I suppose a rough guess would be 2-3% of the value per year)

$480 (Principal portion of payments)

TOTAL: $1532 + Z

So it's not as good as a purchase as it seems. Although renting out the other room would help. As would paying off the PMI. The calculation sort of changes each month with the amortization schedule.

Re: transportation costs, it's actually less than 2 miles from my work so I could bike it. But should I rent I would probably live equally as close so it's sort of a wash. This is a growing area so I am kind of hoping for a greater than 2-3% appreciation, so