I do have time and tools so sweat equity is my main asset.

If you are looking for off market deals where you can add value, then absolutely you can get an affordable home with some sweat equity.If you are looking for something just straight off the MLS, you are probably going to have to venture 20-30 mins out from downtown. 

If you are not happy with that have her contribute a greater amount of cash otherwise get her involved in the sweat equity as well.

So when you go to sell, unless your market skyrockets, you are not going to make much if any after only making a handful of payments.In my opinion the better option is to put the 3.5% down (FHA), put your blood, sweat, tears and money into it.

(sweat/elbow grease equity) with you being home with the little ones you would be right there capable of handing concerns / repairs or calling contractors for the repairs in a timely manor, also doing / overseeing work / rehab on the units, so you could use being home full time to your advantage, and with school you will have that open block of time. i also understand that money is tight, it takes 2 in most cases to make ends meet these days but you guys sound like you have your head on strait an moving in the right direction to get out of debt and into a better standing point in your new location. but YES the idea of house hacking is to have the cash-flow pay your mortgage and if you have the numbers right, have the possibility to put a dollar or so in your pocket above expenses but do not expect allot above the payment for your first investment. but one thing to ask yourself is *what can i handle*  can you handle dealing with repairs or rehab or if not can you set up contractors to take care of your interests since i assume your partner is or will be still working. a duplex would be sufficient to start with to pay your mortgage if the rent comps/market allow it to match your expenses, but myself. if i was to house hack it would be a tri-plex or bigger,  yes it would be a challenge but if a duplex pays the mortgage think about the income from a tri-plex .  

Bob buys an underperforming property, He then invest some sweat equity into by getting it up and running like his identical property and then sits back and reaps his rewards. 

Don't sweat the owner not accepting your bid there is a chance the person who offered them 40 (If that was a true offer) didn't know how to bid on the property. 20k margin on a fire damaged house that only has a 60k ARV is pretty tight.

We purchased our vacation cabin as a family get away and also a project to add sweat equity to it over the years. 

No sweat.

Working with your hands in a trade will set you up well for skills you will be needing especially if you want to add "sweat" equity in a unit.