The house wouldn't be completely paid off but the loan amount would be reduced. 

My only qualm with that is that you end up locking yourself with a fixed payment that reduces your cash flow.

This will give you lots of practice at running numbers and finding deals and building your team as you are practicing, reducing your debt, and saving up some operating cash.

Owner occupied MFH is a great way to get into real estate investing, reduce living expenses, save for the next investment, and keep stepping to financial freedom.

You're a contractor so if you offer to work for them for a reduced rate and you do good work I'm sure they will help you find a deal of your own :)

Simply put, if they were selling a house for $100,000 without a foundation problem, adding a $10,000 foundation problem reduces the value to $90,000. 

If I were seller, I will have contingency for the life of the loan (10 years) with reducing pre-penalty option.

As for your question about reducing from 3/2 to 2/2 I have also done this successfully in Scotts Addition, we bought a row house on Leigh street that was a 3 bedroom 1 bath and turned the small 3rd bedroom into a walk in closet and a really nice laundry room on the second floor.

If it helps to reduce your expenses and increases your cash flow and in addition to giving you good cash on cash return I say it's the right move.

That will greatly reduce your expenses upfront.