Now I spend 5 years hoping they make their payments and somehow refinance to pay off the balloon. 

:)As for LTR rental terms, usually we sign a 1 year lease where tenants are expected to pay Electric and Gas if applicable, while the owner typically pays water/sewer/trash with the city. 

We are building a place with HELOCs then after it is built we will finance it and pay off our HELOC, at least thats our plan. 

When you borrow money you agree to pay it back.

your comment around "approvals will be easy to get" gives me pays if you've not done this type of project before, I understand your logic, and I don't know your local municipality but it always seems to me that no matter how easy we think a project or approval is going to be, something always comes up.

Some local lenders familiar with Gainesville’s market (from what I’ve read in Bloomberg) like SunState Federal Credit Union and Ameris Bank have been mentioned favorably latley and might be a bit more flexible if they understand the repositioning story behind your property.

In addition, you've got your HELOC on your primary you'd have to be paying back also.

You live in one room, rent out the others, and pay your expenses with the income.

I live in Miami Florida and I pay over $3 per square foot in rent with some going as high as $5.

Electric heat can be very expensive in the winter so I would always encourage landlords to have tenants pay utilities so they have some incentive to conserve.