The permitting process drastically changed in the time he bought versus the time he finished the rehab.

I bet that they are on one of those programs where they only have to pay a certain amount for electricity all year round, and so they prefer to heat with electricity because it's "all you can eat", rather than with gas, but I don't know. 

But as mentioned, you will generally find 12 month seasoning is needed to get a new loan based on value versus you cost in project.

In addition to the well over 250k evictions expected in just NJ when the moratorium ends do you identify geo-specific "apartment" REITs and bet against them or buy in?

Your best bet is to talk to a couple property managers and get their professional opinion on the specific location and property your considering 

I bet you will find she owes too much on the deal to make it work.

But then if I can rent this townhome out from the second i take money out of the bank it seems like that's the safer and better bet.   

If your counter is still in good shape, wait until before you sell, so you can list as new granite counters, and I believe there are different tax treatments if you do improvements right before sale versus just updating a rental, but I'm not an accountant, so not sure.  

Doing it the right way will increase the rent you can receive versus doing it the wrong way. 

Consider all three options, evaluate supply versus demand, and take action!