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?  

Maybe a more cunning way to move forward would be to own a motel, maybe with a very experienced motel business partner.Or maybe a Pool Hall, or an LP in a new waterpark, or something like that.I've seen hard times crush men, and I've seen hard times make men refused to be crushed and come back X a ton.It's all in the mind and the will to keep fighting.Many in here have given possible ways forward.It would seem wise to focus on building up a pile of cash again.Talk to your tax consultant about the specifics of your situation too.....Good Luck!

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).  

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).

If the new buyer defaults on payments or otherwise breaches the terms of the mortgage, it could impact your credit and financial situation.Market Demand: Consider the market demand and potential buyer pool for properties sold under subject-to arrangements.

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

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.

The other pool of tenants: One is a couple relocating to area high income earnerOne is  interested in renting as a "personal care home for 4 residents"One roommates working in the area with the same company needing housing for next yearI just need some guidance.