You will be surprised how much a nice color scheme can increase the value of a SFR and the cost is not that high.Remember we are still in a sellers market...

If you were to purchase this property with 25% down, at the asking price, I think that you would be losing money for a few years until you can increase rents 20% ($1200-$1300 per unit).

A yearly rent increase is written into the Lease Option so the amount I get increases each yearf.

Can I increase the rent since its 2 extra people in my property?

Earlier this year, they successfully renegotiated the lease with an increase.

The limit increases the more units the property has (up to 4).

I think the insurance plan I can rely on for the pension increases my ability to leverage myself without worrying about losing everything as much.

If you could do that and tremendously increase your equity, raise rents you may be able to improve your cashflow and then take out some of the equity and go invest it elsewhere.It seems like you are sitting on a huge opportunity to develop some equity, just have to look at all the scenarios and see where you come out best.If you sell, while you may get some walking money and a nice profit, you are likely leaving a lot on the table for the new owner to capitalize on. 

Use it as option consideration on another deal.

It's having the mentality using leverage to increase the income, which will than accelerate the debt payoff of income producing assets all the more faster.