For the past two years we have owned one home that we rent to young professionals, and we live in a smaller rental house. Yes, renters require attention and work, but for us it is worth the hassle.
This arrangement works very well for us. The rental income allows us to cover the PITI, and gives us a small margin that we save for future repairs. Owning the rental gives us tax advantages (we take all repairs on the house, we take the scheduled depreciation, and we take the mortgage interest). We capture all (any) of the appreciation on the house we own.
We are happy living in a smaller house where we don't have to do as much maintenance, and we love the location. The rent that we pay is much lower than the PITI on the house we own. Therefore we also have a higher savings rate.
In general, I think of the house we own as diversification of our portfolio (currently real estate, stocks and bonds) where we get to leverage the real estate holding at least 500% (by paying 20% down) and get substantial tax advantages to decrease our federal income tax. The downside to this investment is the cost of buying/selling and the property taxes we pay.