It might be a 1031 to stay in real estate but defer the tax and improve your situation.Since you're considering both properties here's a little thought:  why not sell the rental and 1031 into a really nice investment property that you may want to live in one day. 

As of right now we are seeing multifamily property owners who have years of deferred maintenance under their belt try to sell at ridiculous prices hoping to get a sucker to bite.

I had also thought about doing a rent to own strategy because it is a fairly large 2 story (2800 - 3000 Sqft I believe) great l home in a nice neighborhood, but I am unfamiliar with how to really present the deal and make it a sweet deal for everyone.

I will be driving down during Memorial Day to do a drive by and take as many pics and videos as possible, but can someone here provide me with some guidance as to what I need to be looking at if I wanted to present this to a potential investor.

You can find some around 300k or less but those will likely have smaller units and/or deferred maintenance.

If you want to defer all tax like you have to do two things - purchase at least as much as your net sale (contract minus closing costs) and you have to use all of your proceeds in the next purchase or purchases.As @David M. says (Mr Foster is my dad by the way David :). you can purchase less than you sell and you can take cash out but when you do that the IRS interprets that as taking profit first. 

So we see a lot of 1031 investors exchanging into properties that have greater depreciable basis so they can really capture the full value of depreciation.Capital gains and depreciation both can be deferred in a 1031.

With the way you have presented the options, it almost appears you are trying to "sell yourself" on opt1 since your "out of pocket" is so much lower and you feel you can refi out of the arm later. 

You can deduct your mortgage interest, defer your capital gains indefinitely or even qualify for an exemption on capital gains altogether.

There is no time like the present to get started!