Depending on your RRSP limits and what you can contribute, you might want to consider self directed RRSP so you can lend that out as arms-length mortgages.

Safety concerns with that plan aside, I am also concerned with potential issues with tenants (turnover, late payments, damaging property, etc.). 

@Chris Valverde Patrick Stoy with MC Mortgage group has strong private money arm, to be sure.But between everything, it sounds like you're taking a bit of an unorthodox approach to your first deal.

You would have to get a loan from a portfolio lender or a 5/1 ARM, basically anything not government backed.

P&I won't go up (assuming no ARM), but everything else will.I always recommend using a 30-year loan, instead of a 15-year.

One of the issues with a low credit score is that people are operating without the margin of safety having credit provides.

Basements have fire/life safety codes in the US.

If need be I could tap into the equity from the first deal to fund my renovations on the second property, however I would prefer to leave that equity as a safety net incase anything big comes up.

Instead of seeing it as an oppressive and dangerous wild animal that you have to kill for your safety, think of it as an animal that you need to tame and then use. 

Portfolio option 2 is just a 10/1 Hybrid ARM.