Assuming you "converted" the property to rental 4-5 years ago and you filed for rental applications/permits and have been filing 1040's for that property then you should be good from an age perspective. 

While this is in another state, it should translate.I just bought a house in Florida and it has a detached garage that was converted to an efficiency apartment.

Banks typically only care when you convert from owner-occupied to a rental. 

Convert your current residence to a rental.2. 

Most folks won't convert right off the bat.

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The dilemma i have is that I can’t decide if it makes more sense to embrace the c class identity this property gives the impression of, or put a lot more into the renovation, get better quality tenants and convert it to the B class property that the building (and the area) should/could be. 90% occupied, the yearly rental income is around 600k with 420k NOI. 

Looking at Redfin's data, it is appreciating over time (probably more than $15,600/year), but probably not as fast as other highly desirable neighborhoods in the Bay.I previously lived in this home before I moved and converted it into a rental property.

We would like to convert the basement (which is already finished) into a 5th unit, it just needs a shower and a kitchen but that is a project we would get into while living there. 

If you must have a gym for your personal use, take it with you when you leave and convert to a bedroom (if can legally do it in your area).