Great answers guys and gals, thanks!
On the taxes issue, if and when I move out of the house and rent both units I will definitely be legit with Uncle Sam. I don't really mind paying taxes. But seeing as this is my official residence and the rent is paid in cash, I see very little chance of getting into trouble. I hope this doesn't become the focus of this thread because it is not the intent...
Anyways on to your points.
MEJG, interesting note on the insurance. I have homeowner's insurance but it sounds like you're talking about separating the rental business and it's liabilities from my personal affairs. As MMM has done I suppose I could set up a business such as an LLC and write off a number of business expenses. I'm also not familiar with an umbrella policy if you'd care to elaborate.
shedinator, I like the cut of your analytic jib. I know it makes more sense to hold on to the rental income but I have a hard time not leveraging the $29k. I feel like it's just a bunch of money sitting there earning 0% interest. The $46k I paid is working hard to get the rent money every month, while the $29k is coasting along. I do have a private mortgage, but I'm destroying that month by month and it'll be paid off in 34 months. One thing that is a bit unclear for me is why you're only taking 84% of the annual interest from the potential investment. I also like your 8 year FI plan. I've previously though about that, and although I like my job and my want to work another 12-15 years (I'm 26 now), it would be nice to have that passive income ready to go if I ever got bored or wanted to try something else.
salmp01, great heads up on the 3 year leeway. Three years rent post-moveout would be great and the house should predictably increase in value, at least for inflation. This would allow me to maximize the rental income while minimizing the tax on the sale. As for the distressed houses, I'm not sure how it compares to other areas, but there seems to be a market. I'm in Buffalo, NY, and we never had the housing bubble so we never got the bust. Home values just increase at a steady clip. I purchased from HUD. It's a good market for those looking to landlord because rents are relatively high for low cost houses. Definitely need to know the neighborhoods really well though. The thing that hurts is taxes which are relatively high (especially with school taxes in the suburbs). For instance, I pay $1700 in taxes on an assessed value of $81k. In some parts of the country, I imagine this would equate to an assesed value in excess of $200k. This makes SFH's less of an attractive investment since you only get one unit to rent rather than two (there is a bit of a premium for a SFH rental, but not enough to make up for the loss of a unit). I probably answered more than was asked, but there ya go.