Then you can decide if you want to retain as a rental property (my plans) and/or sell it when the market heats up.  

Tennessee can get a little chilly in the winter months.But like you said.

Even a typical water heat replacement would set you back signficantly.There's plenty to the puzzle that i am unaware of but with what you've outlined here i would consider passing on the property.you know you need managementyou know you need to remove at least one tenantyou know cashflow is meager after considering management.i personally wouldn't recommend a client take on the risk for such a paltry pay out out of state.Even when considering long term appreciation the average amount of headache one assumes with a property will bog you down before the long term play pays off.

Have a salon with a water heater that was installed around three months ago, and the tenant has complained that it's having issues heating the water; I suspect it may be an electrical issue with the system. 

In our property, the house was open to the air in the damp environment of coastal Florida, no heat or A/C at the house.  

Heating temp increasing?

He said I would only need to keep it heated to around 35 degrees to keep it from heaving.

Investors might not but landlords interacting with tenants and sometimes with the neiborhood of the tenants....it might get heated quickly.I'm glad I never had to point a gun to anyone but I do have it in my car and my house.

What is the cost of an HVAC system vs. a heat pump vs. forced hot water vs. baseboard and what is the cost to the tenant? 

For example, electrical is original from 1960, there is no central AC - heating it through baseboard heaters