Please criticize this hypothetical path to get started

[Loren Thomas]

As of late I've been trying to figure the best option to get going in rental properties. What follows is a hypothetical path that I'd like input on from people smarter and more seasoned than myself.

I'm leaving a lot of details as unknown because most of my questions are vague and I'm trying to make the numbers start to work and then find a property that fits within given criteria, rather than trying to fit the criteria around a certain property.

So in the near future my wife and I are going to refinance the house we have and either 1)Move or 2)Refinance and pull out money. Most of this is based on option 1. At the absolute minimum, we'd have around 50k. 

The reason for this post is we are considering buying a 4 plex (again, the idea of a 4 plex, not a specific one at this point) in which we would live in two of the units, and rent out the other two.

Our family requires 4 bedrooms at least (3 kids), and the most bathrooms possible. The 4 plex would be apartment style and build for the purpose, not a cut up house. The reason being with the apartment style (with 2 floors and 2 units on each floor - mirrored of each other) is that we could add a door or archway joining 2 units together and turning (2) 2bd 1ba into (1) 4bd 2ba. Unconventional living, but workable.

We have 2 large outside dogs. We can take the bottom 2 units and build a fenced area, can't think of any other solution to them have to be outside somewhat confined. The concern really isn't with that though, the larger concern is for the renters. Will they see the dogs and tell themselves "oh hell no"? What if a tenant's kid for whatever reason makes their way inside the fence and god forbid gets injured by one of the dogs?

As for the money end of it, let me use one that I recently saw for sale. 735k, basically what I described above. Using an FHA loan to put a minimal amount down of 3.5% (25k) the mortgage comes out to $3400 at 4%. Assuming we could get $1500 for each rented unit, that leave $400 for us to cover. That's far below the $2000/mo mortage we have now. Now I know there are a ton of other expenses, I think $1000/mo would cover those, making our share 1400(ish). After the 25k down, using the 50k we have from our house, we'd be left with 25k to be left in reserve, or into other investments. I know that's very vague but that's part of my question here, how much weight should I put into the 1 or 2% rule in the situation? How much to we spend extra because we live there? During the minimum one year we live there (FHA), probably more, our plan is to buy a small piece of land and building a garage with a 4 bedroom apartment above it and move there. Once we do this, we can return the 4 plex back to a legit 4 plex and then it's bringing in 6000 in rent per month.

I'm aware 735k is a lot of money, here are my thoughts on that. Never again (unless we live there... not going to happen again) will we be able to get so much money for so little down via a FHA loan. My wife and I both have full time jobs and combined we clear 125k (and increasing) a year. We have no car payments and very minimal debt. Because of these factors I think we can legitimately afford 600-800k. Especially considering it seems some lenders will include 75% of rent as income. With that factor included I think we could afford more, however I'm already a little gun shy about spending 600k+ in the first place. Lastly, in the puget sound area things are pretty expensive, I'd love to spend 200k and get 1000x4 for rent, but that isn't out there, at least not that I've found as of yet. I'd love to find a distressed fixable 4 plex as I can do stuff and things, but again... haven't seen it. Although truth be told I haven't looked that hard yet.

Ok, those are the thoughts I had to get out. Thanks kindly.