Need advice with how to convert current home to rental home

[Callie Brown]

Hello all! I am brand new to posting on the forum but have enjoyed reading your posts to try to learn more about investing in real estate. I have a question that I'm hoping I can get some advice on - we are very new to the realm of rental properties so I'm sure there are glaring flaws in my thinking that need to be pointed out. 

So, we currently own a townhouse in Durham, NC. Husband was just offered a job in Kingsport, TN, we are taking the offer, and it's a significant increase in pay (basically doubles our meager combined annual income). We would like to keep our townhome and rent it out, but aren't sure if that makes the most financial sense.

We bought the townhome for about $145k in 2013, currently have just under $127k left on the mortgage, at 3.5% interest rate FHA. (We fortunately closed right before they changed the rules about MIP on FHA loans, so ours will be canceled in a couple of years once we reach 20% equity, or earlier if we refinance before that). Based off other units in our neighborhood that have recently sold, we could get anywhere from 185-205k for it. We both have 800+ credit scores, but don't have much saved for a sizable down-payment on a new place. The way I see it, we have three options:

• 1: Sell the townhome, use part/most of the profit for down payment on new home.
• 2: Based on new income (106k base), we can afford to keep the townhome and get a mortgage for a pretty good house in Kingsport. With this option, we wouldn't have enough saved for 20% down payment, so we'd probably have to have PMI on our loan.
• 3: Do a cash-out refinance on our townhome, use that money as down-payment on new home. This would allow us to refinance into a conventional loan and cancel the mortgage insurance, however, we would lose the awesome interest rate of 3.5. (I also feel like it could be difficult to find a lender who wants to work with us on that, maybe I'm wrong?)

Does the answer seem obvious? I keep going back and forth on what is the wisest decision. We would love to keep it as a rental, as this area is exploding (especially with possibility of Amazon AND Apple coming to the Triangle), so rent would likely increase in the area soon and steadily. It seems the easiest way to ease your way into investment properties is to convert an existing home. We wouldn't be able to profit much at first, but would be able to cover the mortgage and expenses/emergency savings. But potentially walking away from 60-70k would be hard to do, too.

Let me know if I can provide any more information, I'm really looking forward to any advice you have to offer!