If you plan to rent it out then I'm not sure that would qualify/would be fraud.

The other three units you can use as income to qualify at 75% of gross rents, and you are on-site, so you can manager them easily.

I have been working diligently on the assignment of 2 Lease Option agreements for the past 2 months and I have not been very successful finding qualified tenant buyers. 

Can I use the properties rental income to help qualify for a loan?

Our grace period is normally until the 5th of the month so after that a $50 late fee hits. 

As far as I understand it, he qualifies for a 1031.

If you are flipping houses on regular basis, this activity would qualify you for a Truly self-directed Solo 401k plan, which has number of advantages over SDIRA, you then should investigate this route. 

This duplex is currently being rented out, so I'd imagine that it would qualify for conventional lending in as-is condition.

You both may know what each other's strengths and weakness are and if he has a good network and can bring qualified leads, why not use it.  

I suppose if I threaten that I will evict them on a certain day, it would give them the motivation to apply for places less desirable that they may be qualified for.