If you have handled everything correctly, being strong when needed to be, and doing evictions when needed, the Tenant will feel secure because the Tenant will know what is expected of them and will feel comfortable and will want to stay.

That said, I'd like to raise the rent by $25-$50 per month and put them on a 12 month lease with the condition that if they found their home, they can move out once we find a replacement tenant (and we would focus on securing a new tenant ASAP).  

Don’t allow tenants to move into the property unless they have rent and security deposits PAID IN FULL!!

You should talk about to your tax man and come up with a % that your going to consider personal vs rental property as I’m sure you know this is very important come tax time.Be sure and remember your security deposits as well, you don’t want to mix that money up either.

So, I borrowed $15k from my roommate for earnest money to secure the property, advanced another $15k or so from my credit cards to cover points and closing costs, and advanced another $20k buffer (using 0% interest promotions on the cards -- I also had perfect credit), and bought it and celebrated.I had a contractor lined up that was a referral by my realtor, who had sold me my own home.

With what you describe, it doesn't sound like your wife is completely against mortgages and debt, it just sounds like that paid off property is and asset in your family's financial 'toolbelt' so to speak that she takes a sense of security in knowing is paid for. 

Has anyone use a government grant for there first property?

Securing a ton of debt is great while everything is great, but a bank can call your loans due if they get spooked.

Get a private money loan and secure it with a deed of trust on the property.

When they sign the lease, the deposit transfers and becomes the security deposit.