Critique strategy- Buy Short Sell for primary, Rent out current

[Kate Johnson]

Please critique this strategy:

I want to buy a short sell to live in and rent out my current home.  

We are also feeling a bit cramped in current home and would also like to change neighborhoods for a variety of reasons.  We did not purchase our current house at a deal, per se, though it has appreciated quite nicely in the 7 years we've owned it.  I know I need to make my money "at the buy" as an investor.  So what if bought a primary residence at a discount via a short sale?  If we are going to move anyway, is this a good way to get our foot in the investing game?  I really want to make the leap this year and this option seems reasonable in my head. The reason I am thinking this could work is that we are wanting to move anyway but are also not in a hurry and short sales are slow.  

Here are some numbers: My current PITI is $1,360. I think we could easily rent the house for $1,850 per month maybe more. $196k left on my mortgage. Our realtor said she would list our house for $310k, but I think that is a tad high.

We could buy a larger house for less money per sqft where we want to move.  Considering a short sale discount, I was hoping we could find a place we wanted to live for about $250k.

We are within 5 minutes of 2 military bases in Virginia Beach, so the rental market is strong with good candidates.  

Foolish plan? Or a smart way to start our REI journey given that we want to move anyway? Or just sell this current house if we want to move?

[Shawn Q.]

I would plug your current home/financials into the rental property calculator. That will give you a good idea whether you'll make money there. 

As for buying and keeping your old house as a rental, I think it's a fine idea. I did it myself. However, I wouldn't restrict yourself to a short sale. I like HUD homes for an owner-occupant, but because you'll be living there you'll have more options. If I had it to do over I would aim for a small (1-4 unit) multifamily to live in and rent out the rest.

One issue you're likely going to have is financing. I would work with a few banks (or a mortgage broker) to see what you can do. Your current mortgage is going to eat up some of the income you have available to finance a purchase. If you can't get a loan, your plan is off the table. 

After running the numbers and seeing what loans you can get, it might make the most sense to sell your home and use the proceeds as the down payment on a 4-unit. You get a new place to live and really jumpstart your REI journey that way.

Good luck!