There's zero reason to do this when there are plenty of options to avoid it. 

If they do, your best bet is a local community bank that funds these types of properties.Another option is a private lender but that money will be pretty expensive, as mentioned 10%  + 

I’m curious to know what others think about these options.

Happy to discuss lending options in detail.

@Joshua MartinSince you might sell next year, a HELOC is probably the better short-term option—lower upfront costs and flexibility to pay it off when you sell.

I’m going to talk to them today about the complaints that I am getting, but if this pursues, what exactly are my options in this situation? 

That said, if managing sounds overwhelming or you’re strapped for time, hiring a property manager from the start is a perfectly valid option.

(This option would would not carry any debt, all debt would be paid in cash)Or keep our current house, rent it out, and cash flow NET monthly about $1,500?

I believe it to be a little Southern California hidden treasure for cashflow, mainly class C but if you know what you are doing its a really good option to invest locally in CA with decent returns.

Account Closed a PMC has two options to get liability insurance (tenant slip & fall) protection:1) Get added to owner's policy as Additionally Insured (NOT named insured).2) Setup a master commercial policy and add every property they manage to it and then charge those owners the cost of the policy.Otherwise, a PMC CANNOT get liability coverage on a property they have no ownership interest in.So, nothing wrong with their request.