Since it won't be cash flow in this condition and may run into loss it may offset my rental income but hoping to build equity and have another investment in my portfolio.What would you folks suggest?

Not necessarily for the cash flow, but to purchase it early while prices are suppressed and built equity to later use.

My primary house became my 1st rental and thankfully is a great, cash flowing single family 3/2.But now I'm stuck!

You don’t want to spend all the money to convert a garage just to have it be illegal.Structural integrity: One of the most important considerations is the structural integrity of the garage.

@Amber Littlefield for us, it has to cash flow well using estimates for a 20% down 30-yr conventional mortgage to consider it, then we’d decide cash or mortgage.

You could use that equity to buy way more proprety that spit out cash flow as opposed to a single family which is purely an equity play. 

Target would be to have maximal leverage (ROE), but with the constraint that it has to be cash-flow positive (factoring in mortgage costs).

I can definitely tell you there's still a lot of positive cash flowing and 1% rule deals and you get amazing appreciation.

What’s the cash flow/investment potential for each situation?

Currently own a 1 bedroom in Denver area thats an MTR and been cash flowing pretty good and just bought a house last year with doing 2-1 buydown (4 bed, 3 bath, 2400sq ft of livable space, 3200 total).