Maybe an outside the box idea would be to try to force some equity by making some improvements in the house you live in.

Don't give them any more chances. 

With that said, the best proactive measure for vacancies are to have none in the first place - meaning improving retention.

Also, check out if there’s any new development or improvements happening nearby, as that can boost property values.

Say my original loan was $500K, my cost basis with improvements is $1M and I cash out refinance with a $1M loan (can I include the interest of the new loan into cost basis since it’s reimbursing me my cost basis)?

There’s zero chance I would move out.

I say this not to discourage you, but rather to encourage you to prepare for what lies ahead so that you have the best chance of success. 

Right now, the best offers around me are for some 1.3-4 million, that only generated around 100k per year gross, so there would be a high chance of not cash flowing, and paying money, especially with a commercial loan (these buildings have more than 4 units).I was thinking that although the rental itself does not generate money, I would be able to deduct the mortgage interest, and depreciation from my personal w2 income and would be net positive.

Look at their finishes and what they offer guests, use that as your baseline, then improve upon it.

But chances are, if you show her you’re being reasonable, she’ll see it your way.Let me know how it goes - I’m here if you want to bounce more ideas around!