Is it worth it to go through the proper process with the city and run the risk of a huge expense to make this a 3rd unit? 

If your state is an expensive one it might be cost prohibitive to have an LLC for a small rental business.

However, with high rates, the next mortgage would be very expensive, and a vacancy would be intensely expensive with two mortgages.

My plan is to funnel the rental incomes from all three properties, along with my W2 income, back into the HELOC while covering all expenses from it as well.

However, sold data is restricted in a lot of states so it's not accurate comparatively.I have always found the overall interface average.

Value and rents should eventually increase to turn cashflow positive and build your wealth.You're next learning experience will be, now that you are out of day-to-day management, how will you be able to handle the inevitable expense challenges?

Now we could just pad that into the Pm fee, and then we'd raise the PM fee to encapsulate that expense.

That is an 8% expense for inexperience. 

Do you have other ways to decrease your expenses or increase your income aside from real estate? 

It builds wealth and most importantly cuts your expenses and gives you a front row seat at being a landlord.Was the best thing my wife and I ever did.