In the meantime, for your family needs, does it fit the bill? 

You got title of the property but they got physical possession if they're in the property.

Many investors seem to believe there is only one “right” way to invest but we both agree “one size does not fit all”.

I think DSCR Loans are definitely in your future as you continue to grow your portfolio but probably not the best fit here:-Can strictly not use DSCR for any property you live in - would technically be possible if you moved out, leased up the unit you are currently in and provided good documentation that its legit - but this is a firm non-starter for DSCR (absolutely no occupying the property)-DSCR Rates at best are in the sixes on a cash-out refinance - so you would be doubling your interest rate at least on the current property - which could make sense but its a pretty high hurdle.

I got quoted about $15-$20k for a rehab on just one of the units and that just doesn’t fit my budget whatsoever.

- gather your thoughts and what is important for you two- go to an business attorney and let him explain you which entity type fits your need- let him draft an operating agreement and see if this is what you like and revise it if necassary- ask an CPA and do a conference call between your attorney and CPA and check if both are on the same page and if bookkeeping can be done with that entity formThis is how I structured my 6 entities with family/friends/partners/limited partners/investors ect. 

And based on your statement "the more we thought about it, the more we realized we do not have the risk tolerance to rent out the illegal basement unit and would rather make it legal" it doesn't sound like it's a good fit for you.

For example, I would tell them that if they leave in less than 15 days and there's no physical damage to the property, I will hand them their deposit and give them back the entire month of June rent so they have money for a new place.

I have 2 bedrooms already with queen beds, the middle room I can fit a queen bed and 2 night stands but not much else, or I can put twins or bunkbeds and have room for dressers and stuff.

I'm just not sure flooring requiring expansion spacing is a good fit for most bathrooms.