My broker could not find any other carrier to cover a rental condo. 

Just the fact that it's a townhome means there's 1 or 5 or 50 just like it, so I can't picture what could be so unique about it unless the OP is fleecing the seller and he knows it, and the seller has just realized that which is why he doesn't want to sell.

The biggest thing with this is if something major happens are you legally covered if the unit is illegally rented. 

All rents you get from this property has to go back into the SDIRA but if you get a 20 year mortgage (that the rent can cover) and can pay the rental off by age 65 you will have turned that $90K into several hundred thousand’s of paid off real estate.

Instead of evicting them, i was thinking is there some way that I could rent it back to him for very cheap (mainly to cover just the taxes/ insurance) ie 2k a year rather than the going rate of 2k a month for similar properties.

Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy.

At $2450, it will cover those expenses.

Insurance doesn't cover anything anymore and we can almost just pay for all damages with the money we spend on it! 

The HOA covers all the exterior.What was the outcome?

That means I'd be covering a significant shortfall every month.