If you decide to keep your house, you can do an IRRRL after you have made at least 7 payments on your new mortgage.

For example if one partner brings the 20% down payment and the other will do the labor for renovations then what would be a reasonable split be.

You should find out what percentage of the rent is being paid by S8 and by the tenant.Tenants have to sign the rent increase and some won't because they don't want their payment portion increasing.It's also highly unlikely a S8 office will approve the huge increase from $797 to $1300.- BTW: the $1300 includes all utilities being paid by the landlord.

@Timothy Frazier Yes, the only reason to use HML as a down payment is if the property is "mostly turnkey" AND you don't have the funds to renovate AND you have strong CMA comps from a real estate agent that supports that the fact that you are buying a property that is under valued AND your renovations would push that so that you could refinance.

The payments and interest are high.

If you sell, you could access the equity you’ve built and put it toward other investments or save for a future down payment.

For example, the buyer, if they find problems with the property or stop making payments, can blow up the seller's credit.

It will give you a lower interest rate on both properties because you bought them as owner occupants, and it will require less down payment to get into. 

Rentals also build equity through tenant payments and appreciation, with profits taxed at lower long-term capital gains rates when sold.

Where are your fixed rate notes at and their respective monthly PITIA payments ?