CT Homeowner Looking to Trade Up, House Hack, and Invest - Help!

[Mark Roberts]

Okay BP Community, this is my first post (call it my intro - Hi!) and I need your help to figure out a course of action. Here's what I've got:

Currently, I own a 1962-built, 2 bed, 1 bath, 786 sq ft ranch with attached 1 car (space of a 2-car) garage on professionally-landscaped .33-acre in Southeastern Connecticut. The place underwent a full flip in 2008, just prior to my purchase - as the Northeast market was crashing, but unfortunately not bottomed-out. I've finally hit 20% LTV, and owe $170k on the mortgage.

This little gem comes with a $1,400-month mortgage - mostly due to FEMA's assessment that my home requires $3,000/year in mandatory flood insurance. Thank you, Hurricane Katrina. Anyhow, the house is small. Really small. And cute, from what I'm told. As it's small and cute, like a bunny, I'll call it the Bunny Ranch. Also, it's been home to the family (my wife and our female rescue pit/lab) since 2008. It's important to mention that I'm stuck in CT for at least another 9.5 years - at which point I plan to relocate to a less-taxed, smaller-government state.

We have agreed that we are out of space at the Bunny Ranch (if my wife reads this, I'm dead), and have begun casually browsing for the next castle. Thankfully, I found BiggerPockets several months ago and have been plowing through the podcasts on my 2-hour daily commute. Now I want to house hack the next place (as in buy a house with an in-law and/or studio over a detached garage to rent), and possibly hang onto the Bunny Ranch as a rental (our neighborhood has several rental properties).

My problem is that I will likely be unable to rent out the Bunny Ranch for $1,500/mo in our area. If FEMA wasn't holding onto my wallet, the mortgage would look more like $1,200 right now, leaving rent to look like and more-reasonable $1,300/mo.

I've considered:

A) Selling the Bunny Ranch altogether (probably at a loss), finding our next place in CT, and hoping that we can house hack (this one is edging out the others at the moment).

B) Trying to rent the BR and temporarily rent another place ourselves until we find our next permanent spot.

C) Staying put, living with the size (and FEMA...), and paying down the mortgage as fast as possible (to say goodbye to FEMA).

D) Staying put and investing our savings into a buy-and-hold property / properties outside CT.

So, BP Community (if you've read this far), please throw your ideas at me...

Thanks!

- Mark