I'd prefer the bulkhead as it has more functionality, but not sure if that would satisfy code to make it a "legal" bedroom.I am hoping to refinance the property after I make the improvements to get my money back out, but that would definitely require the additional bed and bath to meet code and be considered legal.If anyone has the answers here, could point me in the right direction of where to find them, or just has any advice in general, I'd really appreciate the help!

This is essentially a $6,000+ job of a brand new panel and outside shut off valve for what was previously a perfectly functioning system that had never given any issues. 

Prospective renters will let you know if the property is priced too high, needs work, or the property has some functional issues that's keeping them from submitting applications.

For example:General-Filters (furnace, air conditioning, oven exhaust, refrigerator, and water)-Stove burner when the “eye” needs simple replacement-Batteries and remotes that service the premises-Fan and light pull strings-Smoke and carbon alarms testing and batteries-Ensuring appliances are properly plugged in, hooked up, and used-Removing dirt, debris, and lint in and from connection pipes (e.g. clothes dryer)-Tighten loose screws on all home functions (e.g. doors, hinges, handles, socket -Balancing off-balance appliances-Cable, internet, and phone jacks-Fire extinguishers-Systems operation (e.g. security, irrigation, HVAC)HVAC-Monthly A/C filter and drain line maintenance Electrical-Reset “tripped” GFI breakers-Light bulbs (throughout and at the end of the tenancy)-Blown fuses-Reset breakers in the outside and inside breaker boxes-Socket and plug outlet coversPlumbing-Unclog drains or toilets-Caulking around tubs and showers as needed-Gas pilot lighting-Leaky faucets and shower heads-Toilet flappers, handles, seats and seat lids, tank lid, and flush kit-Sink and tub stoppers-If septic tank present, use RID-X as directed on consumer box-Proper cleaning of garbage disposal-Loose faucets and sprayer heads and hoses-Faucet filters (i.e. aerator)-Open exterior plumbing clean out when necessary (e.g. sewage backup)Exterior-Routine lawn (and pool) maintenance-Adjusting sprinkler heads as necessary-On the last month of tenancy, tenant must perform required lawn maintenance no sooner than 2 days prior to vacate dateThere’s a lot to consider as a landlord.

What are the essential pieces of furniture and amenities I should include to make the unit attractive and functional for college students?

Maybe not all allow, but many do.I don't doubt that they function, even if against the rules.

Gabe,The top theory from the reports I've read and contractors I've talked to is that water got in due to a graded slope towards the house, and a sump pump that was not functioning properly.

Either adding square footage to an existing functionally obsolete 2/1 or 3/1 or splitting off a double lot.

BUT I think you are playing with fire.My primary job function is outside sales building relationships with realtors. 

Value is a function of the income the property produces.