My idea was going to be to add a partition wall to split the garage so each tenant had the own side as well as added privacy / protection.

Most people setup an LLC for this for the added level of liability protection. 

I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.The rent increase you are considering (3% to 5%) should occur to protect your investment. 

Do you think your unlicenced, uninsured, amateur would have paid rent when the units could not be rented as an STR.Your "tenant", the person arbitraging, during COVID could potentially not pay claiming COVID impact (and they would not be lying as COVID reduced their STR income) and could potentially be protected from COVID anti-eviction moratoriums.Our market recently passed a STR quota. 

Nothing will ever go quite as planned and your deal needs to protect for some contingencies.

I believe you cannot prohibit them due to disabilities being a protected class and would be discriminatory.  

Make sure to let him know how he is protected, and go over worst case scenarios, and let him know how you will mitigate them.

People get a little protective of their tenants. 

All investors want the amazing loan terms that you can get in your personal name, but then they speak with an attorney about asset protection and the attorney tells them to put this in an LLC.

It is paid for by the tenant as it protects them.