Start with a rental that has modest rehab requirements such as updating kitchens and bathrooms and make sure you qualify for permanent financing through a lending source that offers interest rates similar to that of  a bank.

Additionally, smaller properties (2-4 units) tend to have lower cap rates because they qualify for conventional financing, which impacts the math.If you’re struggling with cash flow, finding off-market deals or considering seller financing could be a good way to improve the numbers.

If I decide to go with option 1, I will have to borrow the money for the renovations at my primary and it may make it harder to qualify for a loan given the little or no cashflow. 

If they want to bring on a new roommate, you screen them like anyone else and if they qualify, great- you can talk about amending the lease at that point, but that is only a courtesty. 

Not practicing law in your state though, so you need to consult a qualified lawyer in your jurisdiction to see what to do

I do qualify for being a broker which comes with some additional education etc. 

A well qualified business broker or someone else experienced in those calculations (think someone with statistics/finance expertise) can easily do this.  

I havnt even spoke to a lender yet on what I qualify for.

A tenant doesn't qualify for a S8 voucher by making good financial and life decisions, so what quality of people do you think the system is dealing with?

The most likely options are exchanging:Life insurance for life insuranceLife insurance for endowmentLife insurance for non-qualified annuityPersonally, I would first determine what type of exchange you want to do.