Worth approximately $110k.The monthly payment is maxing us out but working a 2nd job to save up $$ for the rental property, but that's going to take approximately 1-2 years before i can save up enough for down payment + rehab costs.  

Sometimes the little extras can save you on the carrying costs. 

Save up, pay cash, get reliable but a good value...the best rule of thumb to live buy is put as little of your money into things that go down in value as you can...which is basically everything EXCEPT Real Estate....and maybe stocks...but basically you are only authorized to buy real estate from now on haha..I am half kidding...half.Pay off the debt, cut the expenses, save money like a crazy person and keep doing what you are doing...Live in flips are one of my favorites....even better, live in flip plus AirBNB for part of the year in a hot market airbnb market

I'd rather put less down but I want to be able to maximize this opportunity without making Uncle Sam raise an eyebrow.

Agreed, the owner likely just Thinks he needs to do this....no mtg, legal or tax savings reason for doing it.

You can save on interest, loan fees, etc.  

For the first year, save all "cash flow" in a dedicated account and ensure you keep it there for your emergency fund.

Credit monitoring saved my butt a few times.

@Philip Amundson Admittedly I would say most properties do need some small repairs and/or updating to maximize rent so I'm not going to pretend you will be able to find a 100% turn key property, however if you can find one, then it will preserve your cash and set you up better for #2.  

We currently have no money saved for a down-payment on a new place, so we'd like to research if taking equity out of our current home while continuing to rent it out is a feasible strategy to get us in a new place in Rochester.