SFH seems to be the most practical fit since that's what we know best, but we're open to learn!

But while the plan was always to house hack, I didn't spend enough time looking at what would make the best rental.

When I underwrite my deals, I plan on 5 years without a refi. 

Think about your long-term financial plans.

My wife and I are both W2 and we are evaluating to buy a vacation home to enjoy it, but planning also on renting it as a STR while not being there.

Current rent for a 3/2 is 2200$ .Is it wise to convert the officeroom into a bedroom by adding a closet and then market it as a 4 bed 2 bath for 2450$.What will you do if you were in my shoes. as long as it has windows and you can add a closet and it fits, then yes absolutely turn it into an additional bedroom. 

Keep in mind your ultimate goal for investment and does buying at 30-40% fit in that goal. 

The cost starts with  1.) plan cost (survey, civil engineer, site plan, architect, structural engineer, mechanical/electrical/plumbing (short for MEP) plans, etc.).

Talk to them and let them know that if they have that many concerns, perhaps it isn't a good fit and you're happy to give them all of their money back. 

I planned to tell them that "I will waive the final 2 months of the lease but unfortunately I will have to keep your security deposit".