When you become a real estate investor you stop being a typical homeowner.
We are the results of our decisions. It is not uncommon for people to "over-improve" their home because they rationalize that they are going to live there and enjoy it. However, when circumstances change, and they need to sell, they kick themselves for over-spending.
As long as you think you made the best decision at the time, then you just have to move forward. In your case that means when a home becomes an income property, stop thinking about it as "my home" because it will drive you crazy.
We were in the same boat and in the Long Term (18 years) after becoming accidental investors it worked out great. I recommend checking with your lender on their flexibility of having the property be "non-owner occupied".
Also, talk with a CPA and financial planner about what happens then its time to SELL your home.
As the previous posters said, speak with a lender to find out if this is even a possibility for you.
Both FHA and Fannie Mae/Freddie Mac have recently instituted new guidelines for converting a primary residence to a rental then purchasing a new home (called Buy and Bail policy). This would apply to most of the available mortgage options out there in the marketplace right now.
Basically unless you have at least 25% equity or more in the current home (which from your post it sounds like you dont), you have to qualify for both the current house payment AND the payment on the house you intend to buy, and you cannot use any prospective rental income to help offset things. In addition you may need to have 6 months worth of BOTH house payments in reserve.
I can go over the finer details with you if you like. Just shoot me an email or give me a call at 734-528-5511
But before doing anything you need to first check with a good mortgage person to see if you will qualify for both homes. Due to the amount of problems in the marketplace many banks are getting very strict when it comes to buying a new home when you are renting the old one. If you need any assistance feel free to give us a call.
There are lots of owners in your situation. With the market being down, if people don't need to sell, they are sitting tight. The good thing about selling in this market is that you'll likely make it up on the buying side.
When considering leasing, you should first check with your lender. In the past they had counted a large portion of the rental payment, but things may have changed so you might want to inquire before you go further. Also, check your mortgage because leasing may invalidate the terms.
I've heard owners having good and bad experiences with leasing. If you opt to go that way, be sure you request a credit report and references.
To research becoming a landlord, here's a link to the State of Michigan Tenant/Landlord Handbook:
Whatever you decide to do, Good luck!