We've had it happen before, nothing major, but just some extra money we weren't originally planning on spending to turn a unit. 

Stop hanging out with your deadbeat buddies who spend all day drinking, talking sports, and otherwise wasting away.

The 500-hour rule means spending at least 500 hours actively managing your rental property, which could include things like tenant communication, maintenance, and bookkeeping.You can also group multiple properties together as one “activity” to make reaching the hours easier.

Not sure what the layout looks like or location - but in a solid location, which I'm assuming since it's an STR, you should be able to in the ball north of $800-1000 per room and even more so for the rooms with private baths.

I usually spend my time, if the seller is present, keeping him/her out of the way if needed, pumping tenants for info, taking measurements for room sizes and drawing floor plans with doors and windows and noting appliances and taking pictures.We look for value add properties that are in decent structural and mechanical condition (except for one deal that we got really cheap).

Did you use a local bank/credit union or a private lender?

You'll spend a lot of time (sounds like you may have already) spinning your wheels in trying to find the right lender, whereas a solid broker can pair you up with the right fit right away and get your project moving. 

Look at the comps in your market, having extra storage is a bonus so as long as it has working electrical I wouldn't spend much time or money on it other than making sure it's clean for showings.

Learning about fix-and-flips and leveraging private or hard money lenders can help finance flips.

The last thing you want to do is spend the money for a conversion and then get shut down by the neighbors or city.Is there another way to access these bedrooms other than the garage?