At this point I feel I cant move forward without some way to reduce risk or change the situation entirely.

I countered with seller paying all closing and prepay - about $7,000 and reducing price $5,000. 

If he's current on rent after two years, maybe you grant him another 2-year option.However you decide to do it, do not execute lease-purchase contract where a portion of his rent payment goes to reduce the purchase price on the house.  

My family's living expenses currently with housing are about 25K/year (we live frugally) which Is why I really want to pursue a buy and hold duplex that we can live in at least for a while to reduce that amount.

You're probably not going to have any luck with reducing property taxes.

My question is, how can I reduce the space the utilities take up, in particular the HVAC?

Reducing my living expenses through house hacking seems like the best way to save money and slowly build wealth.I have been looking on the MLS through realtors but not having much luck. 

A hard inquiry can reduce your score by by 2 points. 

I am told the pre tax profit for a flip will be taxed at your personal income bracket which could reduce the total profit by another 20-24%.When I run the numbers and try to compare it with a rental calculator to see whether renting and holding for 4-5 years makes more sense I get confused.

ClintonI would hang onto as much of your credit as possibleI see your pointbutbig payouts means big riskyou can reduce the amount of earnest money just askyou can short term bridge loan but remember there is fees to considercrunch the numbers add 20% and do the deal if it makes senseenjoy