We’ve been tossing around the idea of converting one of our bedrooms into a gym (treadmill, weights, bench, etc with towel and water service).

You aren't "dead in the water" by any means.However, there's a piece here we don't know - how much do you owe on the property?  

In spite of all that work we discovered that the hot water heater didn't work (they didn't bother to replace a $300 water heater that their initial 4 point inspection stated was original to the house (1983).  

I Expect not, I expect the water to get to my property even more in the next few years. 

For water we always keep that in the owner's name (since, in our area at least, water bills run with the house and not the customer).

A riverfront project is underway to develop the city along the water.

Add water meters to separate the exterior usage to the building usage (sometimes the water companies will provide a break for that portion).There are a lot of things to consider and utilities are a big part of operational costs associated with apartment ownership and management.Best wishes to you.

Tenants never water like you would and they often don't report issues like you would see. 

However, we faced a few unexpected challenges:A hailstorm damaged the roof while the property was under contract.The main water line to the property failed.

Drinking plenty of water and bringing along nuts/trail mix or a piece of fruit while out on the road has definitely been a plus in my experience.