Matt,
My suggestion is going FHA, allows you to purchase the property honestly as a primary residence, allowing you to get the best rates, low down payment, finance the FHA MIP on top of the purchase. The down-fall is by going FHA, the home must meet a specific minimum standard and move in condition. You have to acknowledge FHA is for purchasing homes to be lived in, with no surprises typically that strap the new homeowner right off the bat or within the first 2 years of occupancy.
The cost of this, also means you are usually not getting these home at any real discount because "the home must meet minimum standards.
The alternative is searching for and purchasing a home using an FHA 203k loan, that must be worked on, that does not require the seller to make modifications prior to sale, and often are homes over looked by many other buyers. Still decent rates on these loans, granted not the same as a standard FHA, so you could consider a FHA 203k Streamline or a FHA 203k traditional.
Streamline could be properties that need less than $30-$35k initial improvements done by 3rd parties. So a home that needs a new roof, and new carpet and paint. A STANDARD FHA loan, would not be available on a home that needs a new roof, ($10-$13k cost for replacement), new flooring because the floor has issues ($8k), new appliances ($3k) and a new A/c ($6k) .
So the bank finances the home, sets a $30k escrow account associated, and you take care of the major components that would normally stall any other FHA buyer or be a hindrance in any other home inspections. Then while living in the home, maintain it, continue other minor renovations (paint, landscaping etc) and in a few years, after enjoying the annual appreciation you can choose to rent it out or sell.
You must also be aware of the tax ramifications (lived in 2 out of the past 5 years) etc. So you might live there 5 years, then rent it out for 3 then sell. Then you just received 8 years of appreciation, have half to 3/4 life left on all major components, have a tax portability you can utilize to move to your next property and do it all over again. Or you could rent it out for a longer duration, and move back into it for 2 years prior to selling and claim it as a primary residence again.
3. As far as finding the right property... it is as simple as buying it right in a sought after area or a soon to be sought after area. We have offices in Orlando and Brevard where we find properties like this, some we pick up and flip them, others we find for clients seeking to benefit from a similar scenario as above.
4. Pitfalls include not knowing what you are doing, biting off more than you can chew, or trying to do to much yourself thereby investing to much of your own time or money doing something you should have paid someone else to do, or end up paying someone else to fix / repair what you tried to do. Another pitfall would be not doing a proper home inspection and improper budgeting based on that. I would also suggest choosing a good FHA 203k lender, because the wrong lender (and R.E. agent honestly) could create more stress from the beginning.
5. To answer this question, I would need to know what kind of budget your are looking for and if you really prefer to rent, or if you would prefer to sell at the end of your venture and move everything into the next home and do it all over again. This is the soul searching aspect... will your full time career allow you to also be a landlord, will the returns justify the hassle. In 10 years will you have the funds liquid to move into 2 or 3 properties? And most importantly is your significant other now, wiling to make the same long term commitment to this lifestyle and investment strategy and realize you must purchase homes based on this strategy and most emotion must be removed. Going where the deals are, might mean choosing an area that is number 3 or 4 of where the other "wants" to live.
Just food for thought! Do I get extra credit for length of this post??
