So he wants all the upside (fully occupied and cash flowing) without any of the work (rehab and lease-up).Like @Tyler Watts said, the math wont work.

Their previous lease includes a portion of storage in the basement with laundry access(also in basement).Current set up: tenant occupies floor #2 with separate access to the basement for their laundry and storage.Future plan: reno basement and remove storage/laundry access for tenant.

If you're going to owner occupy and and want to benefit from some rental income then I'd go for it, but if you're looking for some combination of appreciation and cash flow there are better places to put your cash.

The lender required that the property be tenant occupied/cash flowing.

Fully occupied, the property grosses $5,570/month with $4690 net profit after expenses.

If you're occupying the vacant unit, what makes you think you can evict either tenant from additional units?

The tenant who occupies the property pays the rent.

Whether a cashout refi or purchase, though, youre going to have to go through the same underwrite as this is an owner occupied residence. 

The way the guidelines are written is that you have to intend to occupy the property as your primary residence when obtaining the loan, and this is generally demonstrated when you live in the property for at least one year.

I feel confident we will have it occupied and possibly at a higher return than anticipated at closing.