Whatver you decide, you'll want to ensure the proper addendum is attached to the lease to specifically outline how utilities are handled and charged if charging tenants. 

If it is a regular rental, draw up paperwork that clearly outlines how much money they lent you, when it will be paid back and how much (eg if you buy a house for $400K and 10 years later they move out and it sells for $500K-do they get a percentage of the profit (after taxes and costs)?

Yes you can you need to pass both tests. 7 days or less and the material participation test which I have outlined above 

Or do they just go by the bottom up calculation you outlined?

They will help outline the quickest way to fix the credit score.

@Jonathan Dempsey, thanks for taking the time to outline this for us.

The themes that I am picking up from the discussion outline a few possibilities:1. sell and upgrade to better properties, better, PM, better systems.2.

Many of the costs you've outlined above are upfront set-up costs.

@Yusef PresleyI would avoid paying contractors hourly and make sure there is a construction draw schedule in the contract that clearly outlines when funds will be dispersed to the contractor throughout the project instead of one lump sum payment.

However, it is the third factor—whether investor business had actually commenced—that is determinative here.In investor’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property.”