HELOC and how it pertains to a change in status vs mortgage

[Michael Erb]

We live in unit 3 of a 6 unit townhouse building. We own our townhouse, it is paid in full. We paid 135k for unit 3.

We want to buy unit 5 in the same building. It has identical floorplan and space as our unit 3. 1280sq ft with unfinished attic. We can buy it for 110k. It'll needs about 40k of renovation which will give it a remodeled kitchen, bathroom and finished attic space adding another 400sq ft of living space. 

Ultimate goal is to make unit 5 our primary residence and rent Unit 3 which should rent for 1400/month. HOA fees are 150/month for each unit.

Unclear about the path to follow for best cash flow result.

Would it make sense to get a HELOC on our current primary residence of unit 3 and then use that money to purchase unit 5 and then get a separate loan for renovation budget? What happens when you have a HELOC on a primary residence but the status of that residence later changes to that of being a rental? Does the loan balance have to be repaid in full at the time that the status changes? Or does it not matter?

Or would getting a new mortgage for unit 5 be a better way to go? If a new mortgage is the way to go, would it be better to get 30yr fixed or to consider a 7 or 10 year ARM seeing as we will likely want to sell one of the units after 7-10 years.

Our main goal is to have the rent from Unit 3 pay for the purchase and renovation of unit 5. We are near retirement age and expect the property value to increase solidly over the next few  years. The property is in a highly desireable location where townhouses are in short supply and within walking distance of restaurants, shopping etc.

Two of the other units with finished attics in the same building  have sold within the last 2 years for 160k and 200k.