121 Exclusion - 2 out of 5 year question

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Hi All-

I have a question about 121 exclusion rule. I understand I must own and live in my property for at least 2 out of the 5 years. My friend and I bought a house together as in tenants-in-common ownership in 2011. We have owned and lived in it for the first two years then we have decided to bring in 4 tenants to live with us in the 3rd year while collecting their monthly rents. We intend to keep them for another year (4th year). 

So, now the question is, how does this impact us with the 121 exclusion rule? I thought that we would qualify for the full capital gain exclusion of $250k at maximum each for me and my friend since we have already owned and lived in it for at least two years. However, my friend told me that we would not be eligible for the full capital gain exclusion because we are renting to 4 tenants in the 3rd year. Is this true? 

Let's say we have generated a total of $240k capital gain on the property. It is being split by two of us so that's $120k capital gain each we could claim for capital gain exclusion. However, my friend mentioned that since we are renting to tenants in the 3rd year and will again in 4th year, then our individual capital gain exclusion will not be at full $120k each and will be reduced because of that, say at end of 4th year.

Can anyone please help answer this question? I'd appreciate it!

Thanks,
Arthur