Since the interest rate environment has changed dramatically over the last 6 months I’m torn with what to do.

And sometimes even it can boost your ROI which is fun but decrease your NOI to a point where you're at risk of being under capitalized.The other point to consider is that when you refi you will not have access to as much buying power as if you simply sold and 1031d. 

ARV with rents to market rate would boost that number to 1.3M.

It's really hard for rental rates to change dramatically if there simply isn't enough inventory.     

Even when running the numbers on a home where I could boost the value with a renovation, it still seems to cashflow negative, or at the very best break even.

One thing I've heard multiple times from friends (one who is a contractor himself) is that material costs for rehab have increased dramatically the past year.

This is a huge topic, @Vincent Billera, and one to which the response has dramatically changed in the last few years.Prior to regulatory changes, unless you knew the right people (colloquially were a 'member of the right country club'), you were shut out of the option to invest in anything but that which you can personally afford.  

Sometimes dramatically so.

I definitely like the idea of renting out the main and living in the smaller unit created to boost income.

When you sell the property, you double the CF, dramatically increase the total PV, all with the same equity.