sequoiatree,
+1 on AccidentalMiser's advice to see a local tax advisor who can discuss what will work for your specific situation.
Your statement that "rental properties qualify for more deductions, e.g. on mortgage interest" isn't necessarily accurate. For example, if you buy the property as a primary residence, you'll be able to deduct mortgage interest and up to $10,000 of property tax and state/local tax from your federal income tax (If you itemize. You'll also want to compare the benefits of itemizing with the loss of your standard deduction). If it is an investment property, you don't get those deductions, but you get to use those expenses to offset the income generated by the property. Which one of these choices works out better for you depends on both the property and your own tax situation.
My experience in this is limited to renting out my own house (that I originally bought as my primary residence), but I think you may be making a mistake by focusing only on the bank/mortgage holder. My guess is that they generally won't be too concerned about what you're doing with your property as long as you are paying your mortgage on time (This might be different if you are benefiting from a specific program like a first-time homebuyer program). I'd be at least as concerned about state and local tax authorities and my insurance company. You don't get to mix and match benefits of a rental property and a primary residence for tax purposes. If you tell California that the property is your primary residence, you will probably get "homestead" benefits for property tax increases. If it is a rental property, you shouldn't get that benefit. I suspect they'd take a dim view of someone trying to have it both ways. Similarly, you can't rent out your house and claim the mortgage interest as a personal tax deduction. And I don't think you want to mislead your insurance company and have homeowners insurance when you really need landlord insurance (which is more expensive).
If you rent the property out, you get to depreciate it for tax purposes (although you have to pay back the depreciation when you sell) which can be an advantage. On the other hand, selling a primary residence has tax benefits (home sale exclusion) that you don't get with a rental property (although you could move back into it and convert it back to a primary residence).
It all boils down to: "It's complicated." Since it sounds like you fundamentally want the property as an investment, I think you need to analyze it as an investment property. Your monthly payment will be about $3,000. Are you confident that you'll be able to rent it for more than monthly costs? What about condo fees? Does the condo have any restrictions on renting? Who is going to manage the property? How do management fees (if appropriate) affect your profitability? Are you prepared to go without tenants for a few months? Are you prepared to deal with tenants who trash the place or don't pay their rent?
I am not saying these things to discourage you. Buying a condo might be a very solid decision, but deciding whether to do it and how to do it should be based on hard numbers specific to you. If you don't have the experience to run those numbers, hiring an expert to help you is likely to be money well spent.
Good luck!
